The European Central Bank can oversee lenders in a banking union, the EU's top regulatory official said on Thursday, contradicting a report that said a proposed new ECB supervisory structure would be illegal.
The Financial Times reported on Wednesday that one of the European Union's top legal advisers had written an opinion saying the new structure would be "illegal" and that changes would more than likely have to be made to the EU's treaty.
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But Reuters has obtained the 12-page opinion from the European Council's legal expert and it does not state that the proposed supervisory authority at the ECB would be against EU law, although it does highlight a series of legal obstacles to establishing it.
"The proposal that we have made is legally sound," said Michel Barnier, the European commissioner responsible for financial regulation and the legislation to establish a banking union.
"I do not see any political obstacles to giving non-euro countries a decisive voice in the single supervisor, if they want to join," he said in a statement.
"We need to make sure that the final solution is solid from both the political and legal perspective."
Barnier's remarks came as one of his senior officials dismissed the newspaper report, saying it was wrongly interpreted and out of date.
"Legal issues for the creation of (an) ECB supervision mechanism can all be solved," Jonathan Faull, the director general of the European Commission division responsible for banking union, said on Twitter.
Another EU official, speaking on condition of anonymity, said the European Commission's legal service had found no major problems with the proposed supervisory structure, and the ECB's legal team was also expected to permit it, he said.
The remarks came as European leaders meet for a two-day summit where they will try to bridge division over a banking union, including plans for a single banking supervisor, a move to resolve one of core problems fuelling the debt crisis.
They will address one of the major obstacles to the project: how to cater for the 10 EU countries that do not use the euro, and allay fears that they could be sidelined or disadvantaged whether they chose to join or stay out of the new structure.
In the document obtained by Reuters, legal experts set out the complications of including a country that does not use the euro in a scheme designed chiefly for the euro zone's 17 members but they do not dispute the legality of the scheme.
Officials do, however, spell out the limitations of the structure of the ECB, which is due to take over the supervision of banks, and the difficulties of fully involving non-euro-zone countries in the central bank's decisions.
The document, prepared by legal advisers in the European Council, the institution that hosts meetings of EU ministers and leaders, addresses one option to accommodate non-euro countries - the creation of a new body within the central bank where regulators from countries outside the euro would have a say.
The experts say this would not breach European Union law, so long as the final decision on supervision remains with the currency bloc's central bank.
One of the concerns of countries outside the euro, such as Hungary, is that it would not receive an equal say in supervisory decisions if it joined the banking union.
The ECB could, for example, demand a euro-zone bank keep back more capital to cover losses, a request that could lead to it reigning in lending in the bank's Hungary arm, with Budapest powerless to oppose.
"There are a lot of banks with links between the euro zone and non-euro-zone countries. A lot of countries, including Germany, really want these other countries to be involved," said one EU official.
The idea of creating a new body in the central bank has some supporters in the European Parliament, who hope it will encourage the likes of Poland or Sweden to join.
The banking union is set to have three major steps: the ECB takes over monitoring euro zone banks and others that sign up; a single fund is created to close down and settle the debts of failed banks; and a comprehensive scheme to protect savers' deposits is established. (Reporting By Luke Baker and John O'Donnell)