Europe pushes for centralised bank supervision

The European Commission recently insisted that the 6,000 banks in the euro area be centrally supervised to prevent future financial crises, even though leading German politicians expressed skepticism about the breadth of the plan.

One of the policy’s main objectives is to curb the ability of individual countries to prop up failing banks or conceal problems, ideally improving the stability of the broader euro zone.

The changes are an “opportunity for euro zone leaders to show the world that they are drawing lessons from the crisis and can streamline their supervisory structures,” Karel Lannoo, chief executive of the Center for European Policy Studies, wrote in a commentary.

But some Germans are highly sensitive about giving up authority over their large public banking system, which is partly controlled by states, districts and cities, and that has cast some doubts over the goal of turning the proposal into European law by the year’s end.

Klaus-Peter Flosbach, finance policy spokesman for the parliamentary group of the ruling party in Germany, the Christian Democrats, told the daily newspaper Süddeutsche Zeitung that it was “completely wrong” for the European Central Bank to regulate the hundreds of German savings banks, called Sparkassen. Germany’s regional banks, or Landesbanken, were severely hit by the financial crisis in 2008 and 2009.

Writing in The Financial Times, the German finance minister, Wolfgang Schäuble, said supervision should focus only on those banks that could pose a threat to the entire European financial system, while some central policy makers at Germany’s central bank, the Bundesbank, have expressed wariness about expanding the European bank’s powers.

Even so, the commission held firm on Friday. “We have seen over the past period so-called nonsystemic banks popping up and posing systemic risks, so for the situation that we face, it is important that we have a large coverage and an ambitious proposal,” said Stefaan de Rynck, a spokesman for Michel Barnier, the European commissioner for the internal market.

De Rynck said rules on the winding down of banks, including the sale of assets, would remain — for now, at least — the responsibility of national banking supervisors, as would other tasks like consumer protection.

The commission plans to put most big euro area banks under ECB. supervision by the middle of next year and to bring in the remaining lenders by early 2014, said European officials, who spoke on condition of anonymity because the proposal was still being completed.

The proposal would also modify the way an existing Pan-European agency, the European Banking Authority, operates to enable countries like Britain that do not use the euro to shape decisions, though the specifics of how that would be achieved have not yet been decided, the officials said.

The proposals had been expected on September 11, but were pushed back by a day to allow José Manuel Barroso, the president of the commission, to present them in his annual State of the Union speech to the European Parliament.

By beefing up supervision under the auspices of the central bank, one of the few European institutions to emerge from the crisis with its reputation intact, the commission is seeking to end the so-called doom loop, where member states rack up enormous debts by bailing out their banks.

The commission is also responding to a call made at a summit meeting in June by the German chancellor, Angela Merkel, and other leaders to give the central bank a leading role in banking supervision as a precondition for using European bailout funds to make direct injections into troubled banks, a request from Spain.