Europe yesterday clinched a deal to give the European Central Bank (ECB) new powers to supervise eurozone banks from 2014, embarking on the first step in a new phase of closer integration to help underpin the euro.
After more than 14 hours of talks and following months of tortuous negotiations, finance ministers from the EU’s 27 countries agreed to hand the ECB the authority to directly police at least 150 of the eurozone’s biggest banks and intervene in smaller banks at the first sign of trouble.
“This is a big first step for banking union,” EU Commissioner Michel Barnier told a news conference. “The ECB will play the pivotal role, there’s no ambiguity about that.”
The euro rose to a session high in Tokyo of 1.3080 against the US dollar on news of the deal. After three years of piecemeal crisis-fighting measures, agreeing on a banking union lays a cornerstone of wider economic union and marks the first concerted attempt to integrate the bloc’s response to problem banks.
The new system of supervision should be up and running by March 1, 2014, following talks with the European Parliament, although ministers agreed that could be delayed if the ECB needed longer to prepare itself.
The plan sets in motion one of the biggest overhauls of any European banking system since the financial crisis began in the middle of 2007 with the near collapse of German lender IKB.
The onus is now on EU leaders, who were to meet in Brussels yesterday and today, to give it their full political backing.
In an about-turn, German Finance Minister Wolfgang Schaeuble dropped earlier objections that had led him to clash openly with his French counterpart, Pierre Moscovici, last week over the ECB’s role in banking supervision.
With time running out to meet a year-end deadline, both sides managed to settle their differences and Germany won concessions to temper the authority of the ECB’s Governing Council over the new supervisor.
Agreement on bank surveillance is a crucial first step toward a broader banking union, or common eurozone approach to dealing with failing banks that in recent years dragged down countries such as Ireland and Spain.
The decision also sends a strong signal to investors that the eurozone’s 17 members, from powerful Germany to stricken Greece, can pull together to tackle the bloc’s problems.
Other difficult issues remain.
At a summit in June, EU leaders pledged that once a common bank supervisor was in place, the bloc’s rescue mechanism would have the power to directly recapitalize struggling banks.
Countries like France, Italy and Spain are keen for those powers to be in place as soon as possible, but Germany, worried it could be forced to foot the bill for struggling banks, is not in a rush.
“We have reached the main points to establish a European banking supervisor that should take on its work in 2014,” Schaeuble told reporters. “We stand by what we agreed, to bring Europe forward step by step.”
In the longer term, there is also disagreement over how the burden of winding down failed banks should be shared.
The deal foresees banks with assets of 30 billion euros, or larger than one-fifth of their country’s economic output, being supervised by the ECB rather than national supervisors.
Critically, it also gives the ECB authority to widen its authority to smaller banks if problems arise.
That will satisfy Germany, which wanted to maintain primary oversight of its savings and cooperative banks, nearly all of which will not fall under direct surveillance from Frankfurt unless they run into problems.
Ministers also agreed yesterday to introduce a mediation panel to resolve disputes with national supervisors, a move Germany was satisfied would act as a counterbalance to the authority of the ECB’s Governing Council.
A steering committee will guide the work of the supervisory body, which in turn is answerable to the council. That leaves the final say with the ECB.
Reaching a deal also required granting concessions to Britain, a member of the EU that does not use the euro, which worried that the ECB would undermine its autonomy in policing the City of London, Europe’s top financial center.
EU ministers agreed that a double vote would now take place — one for those in the banking union and another for non-euro countries outside — before decisions on EU regulation are taken.