07 September 2012

Reuters: Europe lays groundwork for banking union

The ECB should have power to police, penalise and even close banks across the eurozone, the European Commission will say next week when it fleshes out plans for a banking union to tackle the region's debt crisis. (Includes quote from Graham Bishop.)

Commission President Jose Manuel Barroso will on Wednesday set out proposals for the ECB to supervise the euro zone's 6,000 banks, putting it at the head of the current fragmented system of national regulators and reducing their role. The Commission hopes that tighter surveillance of banks by the ECB, followed by the creation of a fund to wind up troubled lenders and a common pan-European guarantee for depositors, can restore confidence in the region after five years of financial crisis.

A banking union will require countries to surrender a degree of sovereignty over their lenders, a prospect politicians in several countries are suspicious of. Britain has decided not to join although many international banks in London with operations in the eurozone will nonetheless be affected by the ECB's new supervisory reach.

The ECB would be able to shut a struggling bank, if eurozone states agree to the sweeping new powers. The draft document lays down a phasing in of this supervision over one year and says the ECB should be able to police all banks. The ECB should begin monitoring half of the eurozone banking sector from the middle of next year. This move would allow for the direct recapitalisation of eurozone banks from the region's permanent rescue fund, the ESM, which could have immediate benefits for Spain and its troubled banking sector. Once that step is complete, work would begin on getting approval for a pan-European resolution scheme to wind up stricken banks, and for strengthening the guarantee scheme that protects depositors.

A banking union will not be effective without these other elements but they will be difficult to implement and may need time-consuming treaty changes. "Anyone thinking this is going to be wrapped up by the end of the year is smoking something. It is going to be very complicated", said Graham Bishop, an EU policy consultant.

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