With Germany's backing, EU nears banking union deal

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Published December 12, 2012

| Reuters

Germany signaled on Wednesday it was ready to back plans to give the European Central Bank new powers to supervise banks across the bloc, raising the prospect of a breakthrough on the European Union's most ambitious financial reform.

Last week France and Germany had clashed openly over parts of the plan, but with little time left for the EU to meet a commitment to complete the framework for a common bank supervisor by the end of the year, both countries redoubled efforts to settle their differences.

"We think that we have a good chance to reach a deal today," Germany's Finance Minister Wolfgang Schaeuble told journalists ahead of a meeting with his European Union peers to agree a plan. "My intention is that we find a solution to the banking union on time before Christmas."

His French counterpart Pierre Moscovici told his colleagues in the meeting that "all the parameters" for an agreement were in place.

After three years of piecemeal crisis-fighting measures, governments are inching towards the creation of a so-called "banking union" that would prevent troubled banks from dragging down sovereign states, as they have in Ireland and Spain.

A single banking supervisor for the euro zone and most other EU states would be a crucial step towards that goal. But even if the bloc agrees to that, other difficult issues will remain, including setting up a resolution authority to close down failed banks and a scheme to protect deposits.

Among the outstanding questions ministers are trying to settle on Wednesday are how many banks the ECB should directly supervise and whether the central bank gets longer than one year, as planned, to take on its role.

A compromise document, obtained by Reuters, won broad backing at the meeting from the ECB and countries including Spain and France.

COMPROMISE

It recommends that banks with assets of 30 billion euros or larger than one fifth of their country's economic output be supervised directly by the ECB rather than national supervisors.

Critically, it also gives the ECB authority to widen its remit to problem banks even if they are smaller.

At a briefing in Berlin before the meeting started, aides to Chancellor Angela Merkel said Germany would not stand in the way of an agreement if certain questions were cleared up.

"We hope for major progress and perhaps a breakthrough," one aide said, requesting anonymity.

Berlin has dragged its feet for months due to concerns that it will be left to foot the bill for European banks too weak to survive when, as is planned at a later stage, a central resolution scheme is set up to close troubled banks.

It remains worried about a potential conflict of interest between the ECB's roles as supervisor and as guardian of monetary policy. Such a conflict could arise if, for example, the ECB were to keep interest rates low to prop up banks.

The tone of Wednesday's gathering, however, was a far cry from a meeting last week intended to finalize the plan when Schaeuble clashed with France's Moscovici. France wanted a broad ECB remit, while Germany had reservations.

Schaeuble had objected to the ECB's Governing Council having the final say over monitoring banks, but said at the meeting on Wednesday that he thought a compromise could be found.

Still, reaching a deal, which EU leaders hope to sign off at a summit on Thursday and Friday, will also require the backing of others with vested interests such as Britain, Sweden, Poland, Hungary and the Netherlands.

SWEDISH OBJECTIONS

Sweden's Finance Minister Anders Borg spelled out his objections to peers, saying there was no way for non-euro countries to participate in the ECB-led scheme on an equal footing with countries in the currency.

He said that Sweden was unlikely to join but could allow the banking union go ahead for others, although he warned it could create "substantial division" in the European union.

"There is a move now towards eurobanks, eurotaxes, euro transfers, euro commission," Borg told journalists ahead of the meeting. "It might be very popular among the eurocrats but I think there are very few Europeans actually wanting these developments."

Britain has similar worries. In particular, London wants to change the system of voting when regulators from across the European Union meet to flesh out EU law, such as defining in detail the type of capital reserves that qualify as a cushion against banks' risky assets.

The regulators meet under the umbrella of the European Banking Authority, but Britain is concerned that euro zone states -- united under the supervision of the ECB -- would vote as a bloc to force through rules that work in their favor.

London has demanded that countries outside the single currency be able jointly to block certain decisions taken by the ECB, a veto that is opposed within the euro zone.

The compromise proposal, put forward by Cyprus which holds the rotating EU presidency says each country in the banking union will have at least two banks supervised by the ECB.

The central bank's Governing Council would keep the final say in supervision, according to the document. It lays emphasis on the need for a clear operational separation between monetary policy and supervision.

Ministers will also consider allowing the ECB more time than until January 1, 2014 to fully take on its role.

All 27 EU states must give approval for the project to go ahead, even if only those countries in the euro zone will fall under the banking union to begin with.

(Additional reporting by Luke Baker, Robin Emmott and Claire Davenport. Editing by Noah Barkin)

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