European political leaders agreed to cede the power to supervise their most important banks to the European Central Bank - no small thing in a continent where banking and politics have long been conjoined. This is a pretty good overview. But the striking nature of the development demands a long view as well:
- As a matter of logic, there's no particularly good reason why the institution that sets monetary policy should be the institution that makes sure that banks are safe and sound. Why should a mission related to unemployment and interest rates make a bunch of regulators also good at cajoling a bank overweighted in Slovenian real estate, or developing country debt, or whatever, to diversify? And yet Europe has just combined these functions in the ECB, instead of simply creating a new bank supervisor, independent of the institution that sets monetary policy.
- In doing this, they have adopted an American model of bank supervision. Fed regulators will tell you time and again how useful it is that they have examiners in the banks they talk to when they talk about the economy. These regulators appear to have persuaded Europe that they are on to something, even though one might assume that the stronger interest in supervision lies in the ability of the Fed to fund itself through examination fees, thereby avoiding congressional appropriations oversight (it also raises plenty of revenue through bond sales, admittedly).
- Without wanting to be too dramatic about it, you can see how unionization advocates pin their hopes on financial integration. It did for Alexander Hamilton. It was a priority for ancient regime France. Finance is so integratable. And once finance is integrated within a particular polity, very frequently broader statebuilding follows. So this may indeed be a red letter day for European Unionists. Also, by adopting an American central banking plus supervision model, it may pave the way for broader harmonization to come.
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