Cracks appear in European banking union scheme

Fri Feb 8, 2013 7:46am EST
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By John O'Donnell and Eva Kuehnen

BRUSSELS/ FRANKFURT (Reuters) - It was billed as a reform that would tighten policing of Europe's banks and end their ability to suck states into crisis. Now fears are growing that a central element of banking union will be scaled back, undermining the whole scheme.

When it takes the role of watchdog for euro zone banks in March next year, the European Central Bank will be confronted with a financial system that is still limping. In some countries, such as Cyprus and Spain, it is in critical condition.

Setting up a fund and agency that, where needed, would shut weak banks - known as 'resolution' - is central to this ECB-led union because it would remove the onus on countries like Ireland to save failing banks alone, running up bills that overwhelm the state.

Yet the political drive to complete banking union is waning, with the reluctance of Germany and other economically-strong countries to put themselves on the line for bad loans made in Spain and elsewhere coming back to the fore.

"It's unrealistic to expect that we will have a resolution authority or resolution fund in time for the new ECB bank supervision in March 2014," said Sharon Bowles, an influential EU lawmaker who will help shape the new regime.

"That means that if there is a problem, it lands back at the national authorities," said Bowles, who chairs the European Parliament's economic and monetary affairs committee.

The problem is simple. "A resolution fund ... is the beginning of (debt) mutualisation and the Germans don't want to go there," said one EU official, pointing to a creeping complacency among politicians since the ECB defused market tensions.

"It's a very tall order to get it completed by the end of the year."   Continued...