EU calls for central ‘banking union’

The European Union’s executive office said the 17country Eurozone needs a “banking union” that can centrally oversee and — if needed — bail out the sector, which has become a weak link in the continent’s financial system.

Fears that the cost of bank rescues could cause governments to need bailouts of their own have been fueling Europe’s debt crisis in recent months.

Spain is in a particularly bad situation because its banks are not only holding massive amounts of shaky government bonds but also sitting on huge losses on real estate investments. The country’s borrowing rates have hit record highs this week as investors worry that it lacks the money to save its banks. One of them asked for $23.6 billion last week.

But Europe’s attempts to address the weakness of some countries’ banking sectors have been hindered by the lack of a central authority with the power to tell banks what to do to improve their balance sheets. That power remains with the dozens of national regulators.

Highlighting the urgency of the issue, the European Commission suggested Wednesday that regulation of the entire Eurozone banking sector be done centrally and that the cost of bailouts be shared.

“Ambitious steps to accelerate and deepen financial integration may be needed,” the commission said in a report on how to deal with the financial crisis, which has pushed the shared single currency to the brink of breakup. .”

Part of the proposal would see the Eurozone’s permanent bailout fund, the ESM, charged with helping pay for bank bailouts.