Finance ministers agreed early on Thursday to place banks in the Euro area under a single supervisor, a step enabling European Union leaders to deliver show of unity at their year-end summit that starts later in the day.
European leaders were expected to hail the breakthrough, which gives the European Central Bank the leading supervisory role over lenders, as a sign they are taking concrete steps to maintain the viability of the euro.
“This is an accord that creates true bank supervision,” Pierre Moscovici, the French finance minister, told reporters after 14 hours of talks. “Step by step, we are resolving the crisis in the Euro zone,” he said.
“We have reached the main points to establish a European banking supervisor that should take on its work in 2014,” said Wolfgang Schaeuble, the German finance minister.
|IN ECB WE TRUST
In a step that enabled European Union leaders to deliver a show of unity, finance ministers agreed to place banks in the Euro zone under a single supervisor
- Deal will put more than 100 large European banks under direct supervision of ECB
- Smaller banks will be overseen by the national regulators
- Idea behind the move is to make lenders less susceptible to political interference
- Present system of national supervisors failed to prevent banks from accumulating colossal amounts of debt, putting the finances of states in jeopardy, and threatening the existence of the euro
|France: Agreed to a formula where only banks holding ^30 billion ($39 billion) in assets, or holding assets greater than 20 per cent of gross domestic product, would be directly regulated by ECB
|Germany: Agreed to allow the central bank to step in and take over the supervision of any bank in the Euro area at its discretion
|Britain: Agreed to a formula that should allow it and other countries outside the system to block most, but not all, decisions on rule making taken by ECB
The deal would put more than 100 large banks in Europe under the direct supervision of the central bank leaving thousands of smaller banks primarily overseen by national regulators. But the ministers insisted that the European Central Bank would be able to take over supervision of any bank in the euro area at any time.
The idea behind the single supervisor is to make lenders less susceptible to political interference than has been the case under the present system of national supervisors, which failed to prevent banks from accumulating so much debt that they put the finances of states like Ireland and Spain at risk, in turn threatening the future of the single currency.
The agreement on a single supervisor should be a springboard for European leaders to discuss later on Thursday steps leading to a broader banking union, like a common system for the orderly closure of failing banks and, eventually, to measures to reinforce Europe’s economic and monetary union, like the creation of a shock-absorption fund to shore up the economies of vulnerable members of the Euro zone.
The European Parliament and some national parliaments, including in Germany, still must approve the deal before it becomes law.
To reach the deal, France agreed to a formula where only banks holding euro 30 billion ($39 billion) in assets, or holding assets greater than 20 per cent of their country’s gross domestic product, would be directly regulated by the central bank. Previously France had insisted that all 6,000 banks in the Euro area should be closely regulated by the central bank.
Germany had sought a reduced remit that would make the job of the supervisor more manageable and faced pressure from a powerful domestic banking lobby trying to shield many small German savings banks from closer scrutiny. But Germany agreed to allow the central bank to step in and take over the supervision of any bank in the Euro area at its discretion.
The Germans also had concerns the central bank could be tempted to alter decisions on monetary policy to make its supervisory job easier, and they wanted to give the system some accountability. As a compromise, Germany agreed to give member states greater scope than originally foreseen to challenge central bank decisions.
Britain, which remains outside the 17 European countries that form the Euro zone, had been seeking assurances that it could be exempt from orders from the new supervisor that would affect its banks operating abroad and lenders operating in the City of London. Britain agreed to a formula that should allow it and other countries outside the system to block most, but probably not all, decisions on rule making taken by the ECB, and to oppose decisions in cross-border banking disputes it disagrees with.
Britain’s chancellor of the Exchequer, George Osborne, told reporter he had ensured “that the countries that weren’t going to join the banking union, like Britain, were protected and their interests were protected.”
For countries like Spain and Ireland, the supervisor is a prerequisite for allowing them to tap a European bailout fund and inject rescue aid directly into their troubled banks. That would allow those governments to avoid weighing down their national balance sheets with yet more debt.
But the system for the direct recapitalisation of banks is only likely to go ahead only once the supervisor is fully operating, and well after a German general election in October. German citizens have grown weary of paying most of the bill for bailouts.
Leaders also must clarify whether the system should apply in cases, like Spain and Ireland, where banks ran into problems before the introduction of the single supervisor.
© 2012 The New York Times News Service