EU Banking Debate Shifts to Euro Area After Accord on Spain

By Rebecca Christie and Jim Brunsden - Jun 30, 2012 6:01 AM GMT+0700

The European Union’s push to unify bank oversight moved to the euro area after two days of talks in Brussels, putting the European Central Bank at the center of Spain’s efforts to extract its government from its banking- industry rescue.

Euro-area leaders asked for proposals this year to unify banking supervision and soup up the ECB’s powers. They referred to a clause in the EU treaty that allows them to give the ECB prudential oversight of banks and other non-insurance financial companies.

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ECB President Mario Draghi welcomed the summit’s overall conclusions and acknowledged the Brussels-based commission’s mandate to assess the ECB’s role as allowed in the treaty. Photographer: Hannelore Foerster/Bloomberg

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The European Central Bank's (ECB) headquarters in Frankfurt. Photographer: Simon Dawson/Bloomberg

The move paves the way for the European Commission, the EU’s regulatory arm, to augment its proposals on deposit insurance, capital requirements and how to handle failing banks. It also acknowledges concerns from the U.K. and Sweden that countries outside the currency area be free from mandates to join the ECB umbrella.

Once Europe establishes a single banking supervisor, leaders said they may allow cash-strapped lenders to be recapitalized directly instead of through their home governments. This could break the link between banks and sovereigns that has plagued the euro area throughout the crisis and become a particular flash point for Spain’s bank rescue.

‘Held Hostage’

“The Spanish sovereign is effectively being held hostage to what is likely to be a tortuous political process in putting the ECB in charge of euro-zone banks,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. He said direct recapitalization of Spanish banks is the summit’s most important achievement and hinges on creation of an independent supervisory authority.

French President Francois Hollande predicted that ECB supervision over euro-area banks wouldn’t be in place before year end. British Prime Minister David Cameron said “the euro- zone countries are well on the way to making the euro-zone bank, the ECB, the regulators of their banks. That will be a good outcome.”

ECB President Mario Draghi welcomed the summit’s overall conclusions and acknowledged the Brussels-based commission’s mandate to assess the ECB’s role as allowed in the treaty. Speaking to reporters today, he did not elaborate on how the commission’s proposals should take shape other than to say “all these things should be, to be credible, accompanied by strict conditionality.”

National Supervisors

The Frankfurt-based ECB might end up serving as an umbrella over national supervisors, rather than building a separate organization, EU officials said in the run-up to this week’s summit. EU members would need to decide how many banks to include and how the ECB would work with the European Banking Authority, which was created to help supervisors coordinate across the 27-nation bloc.

EU Financial Services Commissioner Michel Barnier called on all the bloc’s nations to broker deals on draft financial regulations in the coming weeks as a “cornerstone” of the banking union that EU leaders seek to secure the long-term future of the euro, in an interview in Brussels yesterday. He said decisions on whether the ECB or the London-based EBA gain enhanced powers depends on how all 27 nations agree to further pool their bank-oversight powers.

The EBA, which began work last year, was set up as part of the EU’s response to the crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc. It coordinates the work of national regulators and has some power to resolve disputes between them.

Banking Union

Where to place enhanced supervisory power becomes a trickier decision if individual countries opt out of a banking union, Barnier said, in part because the ECB decides monetary policy for the 17 countries of the euro area, and in part because of other aspects of the EBA’s mandate. Should all 27 EU countries sign up for the banking union plans, then the enhanced power for the EU to supervise lenders should “probably” be handed to the EBA, Barnier said.

“If you are fewer than 27 then there is an issue to resolve with the EBA, if you are more than 17 then there is an issue to resolve with the ECB,” he said. “This is why there are a range of possible models, and why we need some weeks or months to work on this.”

The adoption of proposals that the commissioner has made on bank capital requirements, coordination of deposit guarantee programs and the winding-down of failing banks is a “precondition” for the creation of a banking union, Barnier said yesterday in an interview with Bloomberg News in Brussels. The draft laws should be settled “in the weeks to come, or in the case of crisis resolution before the end of the year.”

Depending on the outcome of the summit, the commission will present plans for extra EU supervision of banks, as well as for “the mutualization of deposit guarantee funds and resolution funds” by year end, Barnier said.

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net