Mario Draghi, aware of the potential for embarrassment, warned last week that the latest major project in the euro zone could not be allowed to pose any "threat to the reputation" of his European Central Bank (ECB).
The concern is justified. In the future, Draghi's staff will not just be expected to shape monetary policy, but also to supervise banks in the euro zone, according to the decision reached at the last European Union summit. A new, cross-border "supervisory mechanism" is to be created, if possible by early 2013 according to a summit paper. This was the condition under which the German government agreed to allow the permanent bailout fund, the European Stability Mechanism (ESM), to inject capital directly into ailing banks.
But the project threatens to become a disaster. Even insiders characterize the tight schedule as anything from "ambitious" to "ridiculous." For one, the ECB, lacking any personnel to take on such a job, would have to start from scratch. In addition, the political haggling over what the new regulatory agency would look like began just a few days after the summit.
Officially, it is up to the European Commission to draft concrete proposals. A task force headed by Commissioners Michel Barnier, Olli Rehn and Joaquín Almunia, and Commission President José Manual Barroso, has already been formed -- with Barnier's staff taking the lead.
Draghi has repeatedly stressed that the ECB will only be "consulted" in the process. In reality, however, his governors have already taken the initiative. During an ECB Executive Board meeting last Thursday, the central bankers didn't just approve a record low prime rate of 0.75 percent. In addition, they decided to quickly assemble their own proposal for the regulation of banks, which they intend to submit to the European Commission by September.
This is because the first ideas that were transmitted from Brussels to Frankfurt were not at all what the ECB governors had in mind. Internal Market Commissioner Barnier wants the new bank regulatory agency to be structured around the existing European Banking Authority (EBA). Its 65-member team in London has been trying for more than a year to at least somewhat coordinate the work of the 27 EU regulatory agencies. Now Barnier wants to expand the EBA and turn it into a real regulatory agency -- for all 27 EU countries. He envisions the EBA transferring only certain tasks to the ECB relating to banks in the euro zone. It would be a nightmare for the central bankers.
In the short amount of time since its establishment, the EBA has largely gambled away its reputation. Initial stress tests, which it launched with great fanfare, were chaotic, while the problems in the Spanish financial industry remained largely undetected in the process.
"The EBA is not able do this," ECB insiders say. But even among the central bankers, opinions vary widely on how to conduct reasonable supervision.
Some members, for example, are convinced that in addition to supervision, joint funds must be created for the liquidation of banks, should the need arise, and for deposit guarantees. Where else should the money come from to cover costs should a bank have to be liquidated? The German government, though, categorically opposes joint funds for the euro zone. The subject was studiously omitted at the most recent EU summit.
There is also debate over which banks are to be supervised in the first place. The ECB directorate wants to start with the 25 most relevant banks. Christian Noyer, head of the French central bank, believes this to be ineffective and openly advocates the supervision of all lenders. That would be 6,144 of them. This is merely "a matter of organization," says a supporter of the proposal.
In the end, the regulatory teams of national agencies would perform the actual work on-site. According to one idea, a "general secretary" with a few dozen or a few hundred employees could be based in Frankfurt, with agencies in the individual countries reporting to him.
In practice, this form of cooperation would likely prove impracticable. The supervision of domestic banks is a sensitive issue. "What will Ms. Merkel say when we want to close a German state-owned bank?" one insider asks ironically.
"We have to be very pragmatic," given the narrow time frame, says Draghi. Other sensitive issues also have to be clarified in a short amount of time. For instance, how can the monetary policy experts in the ECB remain independent if the regulators at the bank are accountable to politicians because they ultimately would be making decisions on the use of taxpayer funds? And what happens to national agencies like Germany's Federal Financial Supervisory Authority (BaFin), which currently operates outside Draghi's jurisdiction?
"I would not dramatize too much the need for doing things fast," Draghi said last week. If he had to choose between "well done" and "now," he added, "I would rather focus on it being 'well done'."