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A senior European Central Bank official has raised questions about the institution’s major new powers to regulate banks after its legal independence came in for unprecedented criticism from a global anti-corruption watchdog.

Yves Mersch, one of six executive board members, said the ECB’s new role as the eurozone’s banking watchdog should be subject to greater democratic scrutiny but defended its role as part of the “troika” of bailout institutions during the sovereign debt crisis.

This week, Transparency International found the ECB had stretched its narrow legal mandate “to breaking point” during the crisis years and recommended that it should no longer have any role in bailing out eurozone governments.

In a key part of the report, which was carried out with the co-operation of ECB officials, TI said the central bank’s “accountability framework is not appropriate for the far-reaching political decisions taken by the governing council”.

In a wide-ranging speech in Frankfurt on Thursday, Mr Mersch acknowledged the ECB’s “broad discretion” in making monetary policy decisions but suggested this leeway should not be extended to its powers over the banking system.

Article 130 of the EU’s Lisbon Treaty enshrines the ECB’s institutional independence and sets out a narrow mandate to ensure “price stability” by setting an inflation target for the eurozone economy. This sacrosanct independence has been fiercely defended by ECB officials as the best way to protect the bank from political interference.

However, Mr Mersch said the ECB’s new powers over banks, acquired since the eurozone crisis, “were hard to reconcile with the principle of democratic legitimacy”.

Unlike its inflation target, the success or legality of these supervisory duties (done under the bank’s Single Supervisory Mechanism) are far more difficult to judge, said Mr Mersch.

“For this reason, it is necessary for the trade-offs and judgement calls concerning these objectives to be subject to a greater degree of scrutiny by democratically elected institutions, or sometimes to a degree of control by democratically elected institutions”, said Mr Mersch, a trained lawyer.

His concerns echo those of an independent audit of the ECB which revealed potential conflicts of interest from its tasks as a banking watchdog with its monetary policy responsibilities.

The ECB’s role in helping rescue retail banks has already come under fire after it hiked its capital shortfall projections for Italy’s Monte dei Paschi, which is due to undergo a restructuring later this year.

Transparency International also hit out at the ECB for unduly veering into the realm of political decision-making while tackling the debt crisis. It flagged episodes such as the ECB’s decision to remove cheap funding for Greek banks in 2015 and “secret” letters it sent to governments in Spain and Ireland pushing for reforms as a condition for its financial assistance.

But Mr Mersch insisted the ECB has only played a “technical role” in the sovereign bailouts carried out by the EU through its bailout bodies – the European Stability Mechanism and before that the temporary European Financial Stability Facility. The ECB is still involved in Greece’s third bailout.

“The duties conferred on the Commission and ECB under the ESM Treaty, important as they are, do not entail any power to make decisions of their own”, he said.

Image via Bloomberg

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