BRUSSELS (MNI) – EU finance ministers worked through the night
Wednesday to reach a deal creating a common supervisory system for banks
in the Eurozone.

France and Germany compromised over the proposed scope of the plan
to agree that the central bank would assume direct responsibility only
for banks with more than E30 billion in assets or whose assets exceed
20% of their home country’s GDP.

Banks below the threshold levels will remain the primary
responsibility of national regulators, but the ECB will be able to
intervene if certain conditions are met.

The new supervision plan is expected to be submitted to national
parliaments for their approval early in 2013. It is the first leg of an
overall banking union, which is expected ultimately to include a joint
bank resolution fund and a common fund for guaranteeing bank deposits.

Once the new ECB-run supervisor becomes operational, it will open
the way for banks to receive funds for recapitalization from the
European Stability Mechanism (ESM), Europe’s bailout fund, rather than
from their own governments.

That should help insulate national governments from troubled
banks, ending a vicious cycle that has been at the root of crippling
fiscal problems in countries like Ireland and Spain. However, it must
still be decided whether countries whose banking problems pre-date the
launch of the single supervisor will be eligible for direct bank capital
injections from the ESM.

Another thorny issue the EU finance ministers had to tackle was the
potential for undesired overlap between the ECB’s bank supervision role
and its monetary policy.

To assuage German concerns about preserving the independence of the
ECB’s monetary policy while subjecting its supervisory role to
democratic scrutiny, the finance ministers agreed to create strong
firewalls within the central bank.

France and Germany, the Eurozone’s two biggest economies, also
engineered a plan to win the blessing of non-Eurozone countries that
wish to join the common supervision scheme, overcoming their concerns
that the ECB’s Governing Council must retain a formal ‘yes’ or ‘no’
power over supervisory decisions. Their solution was to create an
arbitration panel to resolve any disputes that may arise.

Eurozone finance ministers also ceded to demands led by the UK and
Sweden to change the voting rules of the European Banking Authority,
responsible for working out the technical details of EU bank regulation
and mediating between regulators.

Under the compromise, both an absolute majority of countries and a
majority of countries not participating in the ECB supervisory scheme
will be needed to approve EBA rules.

The finance ministers also agreed to give the ECB greater
discretion over the timetable for taking up some of its new
responsibilities.

–Brussels Newsroom, +324-952-28374; pkoh@mni-news.com

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