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Schaeuble Says Bank Oversight Plan May Disappoint Markets

Sept. 14 (Bloomberg) -- German Finance Minister Wolfgang Schaeuble said the European Union risks a backlash from financial markets if it takes longer than expected to set up a common bank supervisor for the 17-nation euro area.

The European Central Bank is due to take on bank oversight duties next year under proposals from the European Commission, the EU’s regulatory arm. EU leaders called for a single bank supervisor in June as a condition of allowing euro-area banks direct access to the region’s firewall funds.

“My concern is always that there is the risk to raise expectations with financial-market participants that can’t be fulfilled later,” Schaeuble told reporters today on his way into a meeting of European finance chiefs in Nicosia, Cyprus. “I don’t see the possibility of a direct bank capitalization from the European Stability Mechanism as of January 1.”

Germany has broadly backed the banking union plans, while emphasizing the need for national regulators to monitor most of the euro area’s more than 6,000 banks. The U.K. has voiced concerns that it and other non-euro nations might be drowned out of financial rulemaking if the plan goes through as offered.

Schaeuble’s call for careful deliberations, along with strong conditions for countries whose banks receive aid, contrasted with France’s plea for speed. French Finance Minister Pierre Moscovici said EU leaders agreed to the clear aim of a rapid setup.

‘Go Fast’

“The direction set by the European Council is very clear,” Moscovici told reporters. “It’s to complete the discussion in 2012 and to go fast. Otherwise everything remains theoretical and our problems are concrete.”

The EU can’t afford to “waste time” in its efforts to tame the crisis, he said. “There’s no reason for us, the member states, to drag our feet. The crisis is there and is affecting everybody, including Germany.”

EU taxpayers have provided 4.5 trillion euros ($5.9 trillion) in capital injections, guarantees and other forms of support to their lenders since 2008, exacerbating strains on public finances that have led Greece, Portugal, Ireland, Spain and Cyprus to seek external aid. ECB President Mario Draghi and the Brussels-based commission want the single supervisor to be the first step in separating bank backstops from national balance sheets.

Luxembourg Finance Minister Luc Frieden said a common supervisor shouldn’t be considered in isolation.

Fiscal Backdrops

“It’s very important that if we do a banking union that we analyze also the issues regarding the resolution fund, that we analyze the issue of fiscal backstops,” Frieden said in an interview. “We have to see how in a single market, where there is the European passport of financial services, there will be an interaction between those countries that are in the euro zone and those that are outside.”

An EU official told reporters today that the common supervisor is “necessary but not sufficient” to begin direct bank bailouts. It will need to be launched and declared effective, and then euro-area officials will consider what other conditions might need to apply.

Schaeuble said nations whose banks want to tap the fund must also hold talks with euro-area authorities.

“Even when there’s a European banking supervision authority, for a bank capitalization to happen the member state always has to not only make a request, but also agree on the necessary memorandum of understanding with the necessary macro-economic adjustments,” Schaeuble said. “Conditionality is not annulled.”

‘Good Outcome’

The proposed banking union needs to be approved by all 27 EU members. It eventually could include cross-border deposit guarantees and pooled funds to stabilize troubled lenders, and non-euro members would be allowed to opt in.

“We can get a good outcome before the end of this year,” EU Financial Services Commissioner Michel Barnier told reporters. He said plans to follow up the common supervisor with stronger deposit guarantees won’t include “an open-ended kitty” at taxpayers’ expense.

Swedish Finance Minister Anders Borg said his nation, which does not use the euro, has two “red lines” in negotiations on making the ECB the single supervisor across the 17-nation euro area and possibly extending its purview to other EU countries.

“We will not accept any burden on our taxpayers,” Borg said in Cyprus today. “We already have fully funded systems for banking resolutions and for deposit insurances so we will not accept that money our taxpayers have paid would be used for other banking systems.”

‘Problematic’

It would be “problematic” for the ECB to assume supervision of the country’s banks, Borg said. Closer coordination creates the “clear risk” that some countries would be required to ease their rules to match common standards.

As proposed, non-euro members wouldn’t be fully bound by ECB regulations even if they decided to join the system, because EU law prevents the central bank from exercising power outside the currency zone. Other nations that chose to participate would be able to share information with the ECB, which would not have binding powers over those governments.

Czech Finance Minister Miroslav Kalousek said the banking union may hurt the common financial market in the EU.

“Our great interest is to see negotiations proceeding in a way that will prevent damage to the common financial market,” Kalousek told reporters. More than 90 percent of the Czech banking market is held by units of foreign institutions, and the country “must very carefully safeguard competences” of its national regulator, which is the Czech central bank, Kalousek said.

The impact of banking union “goes well beyond the issue of supervision and Hungary sees itself very strongly affected,” Marton Hajdu, a Brussels-based spokesman for Hungary, said in a twitter message today.

To contact the reporters on this story: Rebecca Christie in Nicosia, Cyprus, at rchristie4@bloomberg.net.; Jim Brunsden in Nicosia at jbrunsden@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net.

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