The House of Lords EU Committee has warned that the European banking union would pose significant threat to the single market and stresses that the European Central Bank (ECB) must be held accountable to national parliaments for its new powers.

In its 70-page report, European Banking Union: Key issues and challenges, the Committee repeated UK industry concerns that the rights of non-eurozone countries are protected and suggests that in order to protect the single market, EBA voting rules should be amended to give more power to countries with the largest financial service sectors. Currently 27 EU member states exist but the banking union would be made up of a selected number risking financial markets and particularly the UK market.

EU leaders are meeting on Thursday, 13 December at the EU summit to discuss the banking union including the proposal for a Single Supervisory framework, where it is expected that the UK will defend the City of London's title as world premier financial centre.

Lord Harrison, chairman of the House of Lords EU Sub-Committee on Economic and Financial affairs, said: 'The government must go into battle at the critical European Summit to fight for the City of London to retain its premier position as the centre of EU financial services. It is vital the UK government get the negotiations right so that the Banking Union does not undermine the single market as a whole and the single market in financial service in particular, which is so vital to the UK and the City of London. And it must not threaten the position of the UK and other countries that choose to remain outside of the European Banking Union.

'While the UK will not participate in banking union, we fear that the government's confidence that the City of London's pre-eminence may be retained could prove misplaced. A eurozone banking union could place the single market for financial services under severe strain, with worrying implications for the UK. The Government must do all in their power to ensure London remains on top.'

The report recommends that:

• Banking supervision should be overseen by the European Central Bank. But this will place massive power in the hands of one organisation. It is vital that the ECB is held properly accountable both to the European parliament and national parliaments for the powers that it holds.
• The Committee are not convinced that an effective banking union can be created within the existing constraints of the European Treaties. EU leaders need to decide if treaty change is a price they are willing to pay to create a viable banking union.
• For banking union to be effective it will require a coherent three-pronged approach including a Single Supervisory Mechanism, a common resolution mechanism and a common deposit insurance scheme. The Committee regret that political pressure from Germany has led to the latter two elements being kicked into the long grass.
• There must be effective equality in decision-making within the ECB between eurozone and non-eurozone countries who participate in the banking union. Arrangements need to be devised that are satisfactory to non-eurozone countries who wish to take part.

(13 December 2012, Wolters Kluwer Financial Services Europe)