Europe tables draft banking union plan

‘ECB must regulate all euro zone lenders’

EUROPE moved a step closer to a banking union yesterday with a plan for the European Central Bank (ECB) to supervise euro zone banks, a cornerstone of closer fiscal integration designed to end years of financial turmoil in the region.

European Commission president Jose Manuel Barroso outlined the proposal in his annual “state of the union” address, laying out a path to further economic integration that he hoped would underpin the future of the euro currency.

The proposed banking reforms, which need to be approved by the EU’s member states, aim to break the link between banks and states, preventing heavily indebted countries being sucked further into difficulty by distressed banks in need of rescue.

They tackle a core element of the crisis that first struck banks in Europe almost five years ago and escalated into a sovereign debt crisis in 2010.

“The crisis has shown that while banks became transnational, rules and oversight remained national,” Barroso told members of the European Parliament.

“We need to move to common supervisory decisions, namely within the euro area.

“The single supervisory mechanism proposed [yesterday] will create a reinforced architecture, with a core role for the ECB. It will be a supervision for all euro area banks.”

A banking union foresees three steps: the ECB getting the power to monitor all euro zone banks and others in the EU that agree to the oversight; the establishment of a fund to close troubled banks; and a scheme to protect citizens’ deposits across the euro zone.

For the plan to work, it will require countries to surrender a degree of sovereignty over supervising their banks. This has long been a national responsibility, and the proposal has already led to tensions with Germany and Britain.

Although Britain, which is outside the euro zone, will not join the scheme, many inter- national banks in London have operations in the euro area that will be affected by the ECB’s new supervisory reach.

London is also worried that the ECB, emboldened by its new powers, will demand regulation that could undermine the city’s position as Europe’s de facto financial capital. Similar concerns are shared by countries such as Sweden.

“We’ve said that a banking union for the euro area must also respect the integrity of the single market for the whole of the EU,” a UK Treasury spokesman said. “We’ll ensure the agreement on it does that.”

Underscoring the sensitivity of this issue and its potential to upset the new banking framework, the European Commission has suggested the creation of a special voting mechanism among EU regulators as a counterbalance to the power of those in the euro zone.

Germany is opposed to allowing the ECB to supervise all euro zone lenders, saying the central bank will be overstretched if it has to monitor all 6 000 institutions. – Reuters