ECB’s Legal View on Bank Oversight Design Due Early November

The European Central Bank aims to complete its view on how to design a euro-area bank supervisor in the first half of November, a spokesman said today.

ECB lawyers are studying how the Frankfurt-based central bank could take on bank oversight for the 17-nation currency area, without interfering with monetary policy. The ECB is also examining how the supervisor could include views of non-euro area countries that volunteer to join the banking plan.

Ultimate authority at the ECB rests with its Governing Council, which is made up of only euro-area members. Sweden, Hungary and other nations outside the currency bloc have said they might veto the banking union plan unless it includes a way to include all participating countries in oversight decisions.

The European Commission unveiled proposals in September. Last week, European Union lawyers gave their input to a compromise prepared by Cyprus in its role holding the EU’s rotating presidency.

The EU lawyers concluded that there should be changes to how the new bank supervisor would interact with the European Banking Authority, a London-based agency that coordinates disputes among regulators, according to two people familiar with the matter. The lawyers also said giving oversight power to the ECB creates complications when applying EU regulations on bank capital rules and other regulations.

Legal Opinion

The EU lawyers concluded it would be illegal for the EU to order the ECB to give non-euro nations a full voice in central bank supervisory decision-making, according to the people who asked not to be identified because the legal opinion isn’t public. To get around this hurdle, the EU has been exploring avenues such as allowing the supervisory board to make recommendations to the ECB’s governing council.

These recommendations were incorporated in updates to the bank-supervision proposal, which finance ministers discussed last week in Luxembourg.

EU leaders in June embarked on plans to build a common supervisor as a step toward offering direct bank bailouts from the euro-area’s firewall fund. ECB President Mario Draghi has broadly endorsed the effort as “one of the fundamental pillars of a financial union” and pledged a “clear and robust” separation of bank oversight and monetary policy decisions.

EU Financial Services Commissioner Michel Barnier said last week that the commission has gone to the “legal limit” in what it can offer and responsibility now “lies in part” with the ECB. That’s because ECB independence is guaranteed by EU treaties.

‘Equal Treatment’

The updated proposal specifies that the ECB’s governing council “shall ensure equal treatment of all participating member states.” The plan also would give the supervisory council explicit authority over launching bank oversight initiatives, instead of asking the ECB’s governing council to delegate individual tasks.

“The supervisory board will carry out full preparatory works regarding the supervisory tasks conferred upon the ECB and propose to the Governing Council of the ECB complete draft decisions to be adopted by the latter,” says the proposal, dated Oct. 9 and prepared by Cyprus.

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