E.U. Agrees On Bank Supervision

A compromise has been reached which satisfies German and French positions and will establish the foundations of a banking supervisory authority from January 2013, by which time the legislative framework will be established. The mechanism will be set up under the auspices of the European Central Bank (ECB) and should be fully functional later in the year. The supervisory authority will have the power to intervene in any bank within the Eurozone, should the need arise.

When the body is fully functioning, it will have the power to use the European Stability Mechanism (ESM) fund to inject capital into ailing banks directly. Again, should this be necessary, it will be a major step forward because the (national) banks in question can be recapitalised via the supervisory body without the funds being added to the sovereign debt of the country where the bank is based. The aim of the Single Supervisory Mechanism (SSM) is to “prevent banking risks and cross-border contagion from emerging” according to European Council President, Herman van Rompuy.

Germany had argued for delay, insisting that national budget discipline should be the priority (i.e. getting national deficits below the 3% of GDP convergence requirement). Germany wanted the SSM to cover just the biggest “systemic” banks within the Eurozone, but the final agreement covers all 6000 or so banks within the bloc.

It is unclear, yet, if the changes in EU fiscal arrangements heralded by this agreement could provoke amendments to EU treaties which have always been a problematic and unwieldy process, since it may have an impact on the authority of Eurozone central banks, reducing their powers whilst bolstering those of the ECB. However, the move does underline a determination to draw a line under the sovereign debt crisis and the complications that it has engendered in the European banking sector. In the current climate, perception is every bit as important as concrete details.