European financial officials that discuss the joint banking supervision project in the euro area are close to agreeing on creating a new agency, under the European Central Bank (ECB), responsible for the largest banks in the monetary union, according to sources quoted by the World Street Journal (WSJ). EU leaders decided at the EU summit on 28-29 June, to turn to a bank union – joint supervision of banks in the euro area, guaranteeing jointly the bank deposits by a European institution and direct recapitalization of financial institutions in need of emergency from the eurozone funds.
Eurozone finance ministers were responsible to discuss at the Eurogroup meetings of July 9 and 20, on the application of these decisions. Establishing a single authority for bank supervision, with a set of rules for banks in the euro area, is considered by Germany and other stable economies in northern Europe a prerequisite before formalizing the transfer of fiscal resources provided mainly as “mutualization” of the debt of euro area countries and financing them together by single bonds.
However, establishing a single supervisor for the banking sector is considered a precondition for introducing a mechanism to direct recapitalization of distressed banks in the euro area from emergency funds. Official sources close to the situation told the WSJ that the discussions focus on creating an agency subordinated to the ECB to be responsible for supervising the 25 largest banks in the monetary union. Smaller banks would remain the responsibility of national security authorities for financial markets. But these national agencies would report to the European institution subordinated to the ECB, whose headquarters would rather be in Brussels and not in Frankfurt, where the central bank has its headquarters, according to sources cited.
Eurogroup meeting on Monday will not make significant progress in this direction, but rather in the conditions for the €100 billion funding for recapitalization of Spanish banks. However, Finance Ministers should discuss the request for foreign aid coming from Cyprus in June. The new institution will have, at its inauguration, the power to ensure banks’ alignment to the European regulations in this field and establishment of appropriate funds in the financial sector. Later, the supervisor would assume responsibility for so-called bank resolution process, which involves assigning the direction of a troubled bank – recapitalization or liquidation, as well as creating fund guaranteeing the bank deposits in euro area, according to sources. Euro area governments should, however, first, to find a political consensus, as Germany agreement is a crucial element in the implementation of the project.
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