Europe advances towards single banking supervisor

Thu Oct 18, 2012 7:46pm EDT
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By Julien Toyer and Andreas Rinke

BRUSSELS (Reuters) - European Union leaders took a big stride towards establishing a single banking supervisor for the euro zone, striking a deal under which the bloc's rescue fund could start recapitalising ailing banks next year, a French government source said.

The source told reporters at an EU summit that all 6,000 banks in the single currency area would come under European Central Bank supervision by 2014, but most day-to-day oversight would be delegated to national bodies.

Creating an effective banking union, for which this deal is just a first step, is regarded by the International Monetary Fund and market economists as a key step to overcome the euro zone's three-year-old debt crisis.

The French source said the agreement meant the European Stability Mechanism (ESM) could start injecting capital into troubled banks as early as the first quarter of 2013, but a German source said it was "very unlikely" to happen so soon.

The German government source said the ECB would be responsible for supervising systemically important banks and could oversee others if necessary, emphasizing that direct recapitalization of banks by the ESM could only happen once cross-border banking supervision was firmly in place.

The point when the ECB will effectively become the bloc's banking supervisor is important because it would open the way for the euro zone's bailout fund to inject capital directly into troubled banks, without adding to their host governments' debts.

EU Economic and Monetary Affairs Commissioner Olli Rehn said this was vital "to break the vicious circle between sovereigns and banks".

The legal framework would be completed by the end of this year so the ECB could begin working to implement supervision arrangements from January 1, 2013, starting with banks receiving state aid, the French source told a midnight briefing.   Continued...

German Chancellor Angela Merkel attends a debate after delivering a government policy statement during a session of the Bundestag, the German lower house of parliament, in Berlin October 18, 2012. REUTERS/Thomas Peter