European Union leaders reached an agreement on Thursday to establish a European Central Bank (ECB) led banking supervisor for the 17 member Euro-area region by the end of the year, paving the road for the EU’s permanent rescue fund, the European Stability Mechanism (ESM), to re-capitalize struggling banks in the region despite important questions about the new banking model being left unanswered.
In June EU leaders agreed to embrace the concept of giving assistance to struggling financial institutions by allowing them to directly tap Europe’s emergency bailout fund, the European Stability Mechanism, once a banking supervisor is established within the 17 member Euro-area bloc.
Yesterday EU leaders at the EU Summit in Brussels had to endure a standoff between Germany and France over questions about how many banks can be covered and the timeline when the banking supervisor can be implemented.
Eventually EU leaders agreed that the “legislative framework” for the banking supervisor will be agreed by the end of the year, with a gradual implementation to follow in 2013, according to European Commission officials.
“The Eurogroup (EU finance ministers) will draw up the exact operational criteria that will guide direct bank recapitalizations by the ESM,” European Council president Herman Van Rompuy said.
France hoped to get all of the 6,000 banks in the 17 euro area countries under the supervision of a single European body before the end of this year. However, Germany has urged for moving more slowly before having the banking supervisor implemented.
Non-Euro countries such as Sweden that are European Union members in the 27 member EU bloc have raised concerns about not accepting the concept of a ECB led banking supervisor if they were not guaranteed equal voting rights within the ECB structure.
They also voiced concerns that the euro-area countries in the 17 member euro bloc will vote as a group on regulations that impacts all 27 member EU members.
European Commission president Jose Manuel Barroso said that the equal treatment of euro-area and non-euro countries under the supervisor should be guaranteed, maintaining the mechanism would be “as inclusive as legally possible.”
EU leaders have pledged that the single banking supervisor model won’t put non-Euro countries at an unfair disadvantage.
They insist that non-euro nations that join the supervisory framework can receive “equitable treatment and representation.”
The EU has already discarded plans to centralize bank deposit insurance in the immediate future.
The EU is asking each nation to establish it own model for handling bank failures.