Analysis: European banking superpower is no quick fix

Fri Jul 6, 2012 8:11am EDT
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By Marc Jones

FRANKFURT (Reuters) - The euro zone's plan to let the European Central Bank supervise its biggest banks requires governments to give it unambiguous powers, sets a highly ambitious timetable and poses potentially dangerous conflicts of interest.

On paper, the idea of creating an uber-watchdog with knowledge about the risks in banks' balance sheets and information on how much they depend on central bank funding, appears a perfect recipe for an effective supervisor.

The European Commission is expected to lay out the blueprint in September, giving lawmakers time to discuss changes ahead of an end of year deadline, which must be met before the euro zone's bailout fund can start recapitalizing banks direct.

One German official said it was "totally unrealistic" to expect the new set up to be up and running in six months - some experienced in euro zone politics think it could take 2-3 years - but ECB insiders say they already have a clear outline of their plans and that talks with Brussels have already started.

Much of the detail is still to be decided, but plans as they stand would see the ECB supervise the 25 to 30 large, multi-national commercial euro zone banks such as BNP Paribas, Deutsche Bank, Santander and UniCredit.

"I don't think it's realistic to build the ECB up into a single, unified bank supervisor of all of Europe's thousands of banks ... but we will find a sensible solution in terms of a division of labor," the ECB's Ewald Nowotny said this week.

Smaller banks would remain under national regulator control, while those based in the UK, Sweden and other countries not in the euro will not take part as they have no say in the ECB.

Crucially, the ECB's 23-man decision making body, the Governing Council, would take the key decisions such as on closing a bank, forcing a recapitalization or demanding it merge or shed part of its business.   Continued...

An one Euro coin is pictured next to the words bankruptcy (pleite) in an English-German dictionary in Munich February 10, 2012. REUTERS/Michaela Rehle