Can the ECB save the single currency?

The European Commission hopes that expanding the powers of the European Central Bank will help restore confidence in the eurozone

The European Commission has unveiled plans for the European Central Bank to become the eurozone’s sole banking supervisor, as part of proposals designed to shore up regulation in the area of the single currency.

The ECB would take on much of the work currently undertaken by individual national regulators and wouldsupervise all 6,000 banks in the eurozone, not just those deemed to be systemically important.

The plans also include a proposal to reform the London-based European Banking Authority (EBA), which would continue in its role overseeing the work of national supervisors in all 27 European Union countries, but would be given greater powers to over-rule member states.

The Commission has set an ambitious timetable and has urged EU member states to approve the plans swiftly – by the end of the year – so that the system can start operating as early as 1 January. However, some member states, most notably Germany and the UK, have already indicated that they have concerns about the plans, and wrangling is expected to last at least several months.

José Manuel Barroso, the president of the Commission, described the proposals as a “major step to a banking union”, which, he said, “will restore confidence in the supervision of all banks in the euro area”.

The frailty of national banking supervision has been blamed for some of the weaknesses in the sector that contributed to creating a vicious circle between the eurozone’s sovereign debt and banking crises.

“We should make it a top priority to get the European supervisor in place by the start of next year,” Barroso said in a statement yesterday. “This will also pave the way for any decisions to use European backstops to recapitalise banks.”

Monitoring behaviour

Under the plans, the ECB would join up the current fragmented system of national regulators and have the power to monitor banks’ behaviour, demand that they keep greater levels of capital, impose sanctions for rule breaches and even close banks down. National regulators would be maintained and would carry out day-to-day supervision.

Crucially, the ECB’s new powers would also grant it the right to inject financial aid from the European Stability Mechanism (ESM), the eurozone’s permanent rescue fund, directly to banks.

Germany’s government has raised concerns about the scale of the ECB’s remit, warning that it should supervise only the eurozone’s largest banks, while the UK is concerned that the new system threatens the integrity of the EU’s single market and London’s role as Europe’s financial capital.

It is also wary of the reforms to the EBA that would affect the way it rules on disputes between national supervisors, enabling it to over-rule national regulators. Currently just five of the member-state representatives on the EBA’s board canblock a decision.

The Commission wants to change this so that to block an EBA decision would require a simple majority of the member states representatives that would have to include at least three from eurozone countries and three from non-eurozone countries.

Yesterday’s proposals come in the form of two draft regulations – one to set up the ECB as banking supervisor, one to amend the role of the EBA – and a more general ‘roadmap’ of the steps that are needed to create a fully fledged banking union.

The ECB proposal needs unanimous approval from the EU’s 27 member states to become law. The EBA legislation has to be agreed by a qualified majority of EU member states and the European Parliament.

EU treaties stipulate that supervisory tasks can be granted to the ECB. The proposal lays down safeguards to ensure the separation of the ECB’s new role and its traditional monetary-policy tasks.

As part of its roadmap to banking union, the Commission said that the establishment of the ECB’s supervisory role should be followed by the creation of a fund to wind down stricken banks and the setting up of a eurozone-wide scheme to protect people’s deposits.

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