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banking supervision
European Union leaders have agreed on a roadmap for eurozone integration beyond the deal on centralized banking supervision, German Chancellor Angela Merkel said.
Specific dates have not yet been agreed for the phases of integration.
But the EU summit chairman, Herman Van Rompuy, said a deal should be reached next year on a joint resolution scheme for winding up failed banks.
Herman Van Rompuy’s far-reaching roadmap was the main topic of the two-day Brussels summit.
Speaking after the summit talks, French President Francois Hollande said: “There is no doubt today about the integrity of the eurozone – Europe cannot now be taken by surprise.”
But beyond the banking reforms, he said, Europe must address the problems of unemployment and feeble growth.
The deal to make the European Central Bank (ECB) the chief regulator should pave the way for direct recapitalization of struggling eurozone banks by the main bailout fund, the 500 billion-euro ($654 billion) European Stability Mechanism (ESM).
Spain is especially anxious to get that help for its debt-laden banks.
Direct recapitalization would help break the “vicious circle” in which bank debts have put a crippling burden on national budgets and led to massive taxpayer-funded bailouts.
However, Germany insists that the ESM should not be used to write off the existing “legacy” debts that have burdened Spain, Greece and the Republic of Ireland. Any ESM loans will be accompanied by tough rules on budget discipline.
At a late-night news conference, Angela Merkel said “we agreed a roadmap for the future development of the currency union and talked about different aspects of this that are important.
“Above all, it was important to define when we do what.”
Herman Van Rompuy aims to present detailed plans for deeper economic integration in time for the June 2013 EU summit. They would include “mutually agreed contracts for competitiveness and growth between governments and EU institutions”.
Much closer EU scrutiny of national budgets is envisaged, including penalties if governments rack up unsustainable debts.
Contractual agreements on things such as taxation and labor market policy are likely to require changes to the EU treaties – so these are likely to be put off until after the European elections in mid-2014.
The UK, along with Denmark, has a formal opt-out from joining the euro, and will not be part of the new banking union. But the UK’s banking pre-eminence in Europe means it is taking an intense interest in the negotiations.
New rules on prudent banking are seen as vital to bolster the euro, as bank failures triggered the financial crash.
Under the deal expected to take effect in March 2014, banks with more than 30 billion euros ($39 billion) in assets will be placed under ECB oversight.
The ECB would also be able to intervene with smaller lenders and borrowers at the first sign of trouble.
Speaking after the summit, Francois Hollande said Europe had been unprepared for the financial crisis but now had a “crisis management authority” which allowed for the “return of confidence and growth”.
The agreement on a financial transactions tax was, he told reporters, a good example of how countries could be brought into eurozone integration through closer co-operation, signing up to agreements at a later stage.
A non-eurozone country, Lithuania, joined the group adopting a financial transaction tax.
Eurozone integration – next steps
- ECB takes charge of bank supervision no later than March 2014
- Joint scheme to wind down broken banks, planned for launch in mid-2014
- Joint deposit guarantee scheme, to prevent bank runs
- Main bailout fund – ESM – gets power to recapitalize banks, under strict conditions
- More centralized economic governance, including enforceable “contracts” between governments and EU Commission
- Tighter co-ordination of national budget targets
Eurozone banking deal
- ECB to act as chief supervisor of eurozone banks and lenders
- ECB to co-operate closely with national supervisory authorities
- Direct oversight of banks with assets greater than 30 billion euros ($39 billion) or with 20% of national GDP
- National supervisors to remain in charge of other tasks
- Non-eurozone countries that wish to take part can make close co-operation arrangements
European Union leaders have agreed to set up a single eurozone banking supervisor – a major step towards a banking union.
A legislative framework is to be in place by January 1st 2013, with the body starting work later next year.
The European Central Bank-led mechanism will have the power to intervene in any bank within the eurozone.
The deal appears to be a compromise between France and Germany, who earlier disagreed over the timing and over the number of banks the ECB would oversee.
The timetable remains important, because only when the body is fully operational will the eurozone’s rescue fund inject cash directly into ailing banks – so important for countries like Spain.
The deal was, at best, an uneasy compromise between the French and Germans and much wrangling lies ahead.
France and the EU Commission wanted joint banking supervision, with the ECB in the lead role, to become operational in January 2013.
But German Chancellor Angela Merkel stressed that national budget discipline should be the priority.
Germany had been at odds with the European Commission over the scope of the proposed ECB supervision. Under the draft plan, all 6,000 banks in the 17-nation eurozone would be included – Germany wanted it limited to the biggest, “systemic” banks.
Previously, the German government has expressed a desire to retain supervisory responsibility within Germany over the country’s Landesbanks – state-owned banks that play a key role in the economies and state finances of Germany’s federal regions.
Announcing the result of talks early on Wednesday, European Council President Herman Van Rompuy said the 27 EU member states had agreed to set up – by the end of this year – “a Single Supervisory Mechanism [SSM], to prevent banking risks and cross-border contagion from emerging”.
“Once this is agreed, the SSM could probably be effectively operational in the course of 2013,” he said.
EU Commission President Jose Manuel Barroso said that the ECB “will be able to intervene if needed in any bank in the euro area”.
With new supervisory powers the ECB would be able to act early on to prevent a systemically dangerous accumulation of debt on a bank’s balance sheets.
And once the legal framework is in place the new permanent rescue fund, the European Stability Mechanism (ESM), will be able to recapitalize struggling banks directly, without adding to a country’s sovereign debt pile.
ECB supervision will not extend to the UK – Europe’s main financial centre, but outside the euro.
It is more than a theoretical possibility that the interests of the UK and City of London in shaping financial rules will be systematically ignored or overridden, he says.
Both Germany and France appeared to be claiming victory in the negotiations.
German Chancellor Angela Merkel said that the agreement was that “banks must be supervised in a differentiated way. That means that some will be direct… at the ECB level and others indirectly, via the national authorities.”
She also said that ECB President Mario Draghi had told her it would be a matter of some months before the ECB was ready to take on its new role.
Angela Merkel confirmed that the EU bailout funds would not be used to directly inject risk-absorbing capital into troubled eurozone banks until the new supervisory arrangements were in place.
A decision about how to recapitalize Spain’s banks will be made in the next couple of weeks, according to Jean-Claude Juncker, who chairs the Eurogroup of finance ministers.
French President Francois Hollande said there had been no discussion of a possible request by the Spanish government for a bailout of its own finances.
But he said “the worst is behind us”.
“We are on track to solve the problems that for too long have been paralyzing the eurozone and made it vulnerable,” Francois Hollande told a news conference.
EU leaders agreed that the ECB’s new bank supervisory responsibilities would be strictly separated from its role in setting monetary policy.
The banking union plan is fraught with legal complications, as it would give more powers to the ECB and possibly weaken those of national regulators.
There is speculation that it could lead to treaty changes – something that has caused big headaches for the EU in the past.
The UK wants safeguards to protect the powers of the Bank of England.
Jose Manuel Barroso said the arrangement would be “as inclusive as legally possible for non-euro members to join if they want to”.
Earlier, Angela Merkel called for the EU to be given the power to veto member states’ budgets. She said the EU economics commissioner should be given clear rights to intervene when national budgets violated the bloc’s rules.
German chancellor Angela Merkel has called for the EU to be given the power to veto member states’ budgets, as leaders meet in Brussels for a summit.
Angela Merkel said the EU economics commissioner should be given clear rights to intervene when national budgets violated the bloc’s rules.
But French President Francois Hollande said the summit must keep focused on plans for a banking union.
Francois Hollande wants action to revive growth, while Germany stresses budget discipline.
“The topic of this summit is not the fiscal union but the banking union, so the only decision that will be taken is to set up a banking union by the end of the year and especially the banking supervision. The other topic is not on the agenda,” Francois Hollande said.
The banking union plan is fraught with legal complications, as it would give more powers to the European Central Bank (ECB) and possibly weaken those of national regulators. There is speculation that it could lead to treaty changes – something that has caused big headaches for the EU in the past.
The aim is to agree first on joint banking supervision, with the ECB playing the lead role. But the UK – the EU’s main financial centre – wants safeguards to protect the powers of the Bank of England.
The UK and some of the other nine non-euro states are also concerned about voting rights in the proposed banking union.
France and Germany differ over the timetable for such a union, with Berlin advocating caution.
Germany is also at odds with the European Commission over the scope of the proposed ECB supervision. Under the plan, all 6,000 banks in the 17-nation eurozone would be included, but Germany wants it limited to the biggest, “systemic” banks.
As the summit got under way its chairman, European Council President Herman Van Rompuy, invited all 27 leaders to attend the Nobel Peace Prize ceremony in Norway. The EU was awarded the prize last week.
“To mark this joyful occasion I hope all EU Heads of State or Government will be able to join celebrations in Oslo in December,” he said on Twitter.
But Greece, the eurozone state worst hit by the debt crisis, was gripped by another 24-hour general strike on Thursday, with at least 20,000 protesters thronging central Athens, amid clashes between demonstrators and police.
Addressing the German parliament in Berlin on Thursday morning, Angela Merkel said the EU should have “real rights to intervene in national budgets” that breached the limits of the EU’s growth and stability pact.
The EU’s economics commissioner, she suggested, should have the authority to send a budget back to a national parliament.
Unfortunately, Angela Merkel said, some EU member states were not ready for such a step.
“I am astonished that, no sooner does someone make a progressive proposal… the cry immediately comes that this won’t work, Germany is isolated, we can’t do it,” she added.
“This is not how we build a credible Europe.”
On the banking union Angela Merkel has repeatedly stressed that “quality must trump speed”.
Prime Minister Fredrik Reinfeldt of Sweden, one of the 10 EU countries outside the euro, echoed her stance, saying “there are a lot of questions that need to be answered legally” and “it’s better to get things right than to rush things”.
The idea is that the ECB would be able to intervene early on to prevent a systemically dangerous accumulation of debt on a bank’s balance sheets.
Once the legal framework is in place the new permanent rescue fund, the European Stability Mechanism (ESM), will be able to recapitalize struggling banks directly, without adding to a country’s sovereign debt pile.
The prize is a system that avoids huge taxpayer-funded bailouts like those arranged for Greece, the Republic of Ireland and Portugal.
The summit is taking place amid calmer European stock markets than at previous meetings and with less immediate concern over the debt crises in Spain and Greece, analysts say.
UK Prime Minister David Cameron made it clear that improving the EU single market was his priority at the summit.
He said that in the “global race” there was a risk of the EU falling behind.
The EU single market “still isn’t finished, in digital, in services, in energy, and that is the agenda I’ll be pushing very hard at this council”, he said.
Later Finland’s Europe Minister, Alex Stubb, said the UK was looking increasingly isolated and the summit appeared to be “26 plus one”.
“I think Britain is right now, voluntarily, by its own will, putting itself in the margins,” he told Reuters news agency.
“It’s almost as if the boat is pulling away and one of our best friends is somehow saying ‘bye bye’ and there’s not really that much we can do about it.”
Banking union – Brussels’ 3-stage plan
• Single supervisory mechanism (SSM)
• Joint resolution scheme to wind down failing banks
• Joint deposit guarantee scheme
The European Union is due to begin a two-day summit in Brussels that will focus on issues surrounding the eurozone crisis.
High on the agenda will be controversial plans for a eurozone banking union, seen as a key element in restoring confidence in the euro.
In the run-up to the summit, Germany has been urging EU states to consider pooling more economic sovereignty.
Meanwhile Greece, which is at the centre of the European debt crisis, is braced for another general strike.
It will be its 20th since the debt crisis erupted in the country two years ago.
Talks in Brussels are also expected to focus on banking supervision, stricter fiscal oversight and direct recapitalization of banks from rescue funds.
The summit will take place amid calmer European stock markets than in previous meetings and with less concern over the debt crises in Spain and Greece, analysts say.
Speaking on Wednesday, French President Francois Hollande said an end to the eurozone crisis was “very close” and he wanted a deal agreed on the first stage of a banking union.
German Finance Minister Wolfgang Schaeuble has proposed a full fiscal union – control at European level of tax and spending.
On Wednesday, Wolfgang Schaeuble said that eurozone countries “need to tackle problems themselves”, adding that the eurozone bailout fund was there to help countries do just that.
But he reiterated his view that further steps towards political integration would strengthen the bloc.
The meeting in Brussels will be the fourth time that leaders of the EU’s 27 nations have met this year.
Borrowing costs for struggling eurozone economies have fallen sharply since the European Central Bank (ECB) announced last month that it was prepared to buy their bonds in unlimited amounts under strict conditions.
The calmer economic climate is being used to discuss buttressing economic and monetary union, and little will be agreed at this summit.
On Wednesday, Greece and its international creditors are said to have reached a deal on austerity measures needed before its next bailout installment.
Nevertheless, large demonstrations are planned across the country against the next package of spending cuts.
Taxi drivers, ferry workers, doctors, teachers and air traffic controllers are among those taking part in a general strike across the public and private sectors.
