The European Central Bank would be given sweeping authority over all 6,000 euro zone banks under a plan being drawn up by the European Commission, putting Brussels on a collision course with Germany and the ECB itself, which have urged a more decentralized first step towards “banking union”.
The plan, agreed at a meeting this week between top aides to José Manuel Barroso, commission president, and Michel Barnier, the EU’s senior financial regulator, would strip existing national supervisors of almost all authority to shut down or restructure their countries’ failing banks, giving those powers to Frankfurt.
Under the proposal, ultimate authority would pass to a new ECB (explain this) “supervisory board” separate from the ECB’s existing governing council. Although its make-up is still being debated, the leading plan would create a 23-member board: a national representative from each euro zone country plus six independent members, including its chair and vice-chair.
A separate board was deemed necessary to establish a firewall between the ECB’s existing monetary activities, which includes providing cheap loans to struggling banks, and its new supervisory role.
Officials cautioned that the legislation was still being drafted and would not be formally unveiled by Mr Barroso until his state of the union address on September 12. To become law, it must be approved by all 27 EU heads of government; commission officials hope they will agree at an EU summit before the end of the year.
A new single banking supervisor would be the most significant change in euro zone financial governance since the single currency’s creation, giving the EU the kind of federal authority it has thus far lacked to decisively tackle the two-year-old crisis.
It is also a key demand from Berlin in return for what some believe is a more significant crisis-fighting tool: giving the euro zone’s €500bn rescue fund the power to bail out struggling banks directly. Bank bailouts in Spain and Ireland have saddled governments with huge debts that would be wiped away if the funds came directly from the rescue system.
The German government has resisted centralizing all supervisory powers with the ECB, however, arguing that Frankfurt should be left to deal with just the euro zone’s 20-25 largest banks. National supervisors would then be left as independent and coordinating agencies for smaller banks.
Writing in the FT, Wolfgang Schäuble, German finance minister, argues that giving the ECB power over only large banks is “common sense”, since it would be impossible for Frankfurt to oversee all financial institutions. Some senior ECB officials had taken a similar view in closed-door consultations with Brussels, EU officials said, though Mario Draghi, the ECB chief, is more sympathetic to the commission’s view.
Germany’s objections also stem from a desire to keep national control over smaller, politically connected regional savings banks.
Despite the resistance, Mr Barroso this week decided to adopt the more ambitious proposal advocated by the commission’s internal market directorate, drafters of the plan, which argued a narrower approach would disappoint financial markets.
Senior EU officials also noted the current banking crises in Spain and Ireland were caused by non-systemically important banks, such as the small Spanish savings banks known as cajas. “It’s not enough to look only at cross-border banks that are systemic,” said one senior commission official.
Splitting responsibility could complicate the next steps in creating a banking union: setting up a eurozone-wide deposit guarantee scheme and bank bailout fund. If only large banks were covered by those schemes, depositors could flee smaller banks for more secure larger ones, officials argued.