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Draghi Renews Call for Operational ECB Bank Oversight in 2013

Draghi Renews Call for Operational ECB Bank Oversight in 2013
European Central Bank President Mario Draghi has backed giving the ECB control over all banks, saying it would offset a tendency for banking problems to be “hushed up” by national regulators. Photographer: Ralph Orlowski/Bloomberg

European Central Bank President Mario Draghi renewed his endorsement of setting up euro-area bank oversight by 2013, a day after German Chancellor Angela Merkel cautioned against rushing to install the new supervisor.

The ECB’s Governing Council welcomes an Oct. 19 pledge by European Union leaders to integrate euro-area financial systems and “in particular, the objective of agreeing on the legislative framework for a Single Supervisory Mechanism by 1 January 2013 with a view to the SSM becoming operational in the course of 2013,” Draghi told reporters in Frankfurt today.

Negotiations to create an ECB-based bank supervisor have bogged down over disagreements on the regulator’s scope and setup. A German-led alliance this week sought to limit the supervisor to big banks and also called for wholesale changes to plans for managing oversight within the central bank.

The proposal from Germany, Finland, Luxembourg and the Netherlands contrasts with EU Financial Services Commissioner Michel Barnier’s plans to put the ECB in charge of all euro-area banks. All 27 EU leaders last month affirmed their pledge to establish ECB oversight of euro-area banks and set a Dec. 31 goal for political agreement on the new supervisor’s design.

Deutsche Bank co-Chief Executive Officer Juergen Fitschen said today that a banking union in Europe is in everyone’s interest. Germany should be willing to make “concessions” to ensure that everybody can be part of it, he said in a speech in Hamburg.

Design Process

Merkel said yesterday that timetables shouldn’t drive the oversight design process. “Quality has to go before speed” in setting up the single supervisor, she told European Parliament members in Brussels.

Draghi has backed giving the ECB control over all banks, saying it would offset a tendency for banking problems to be “hushed up” by national regulators. Yesterday he again endorsed the timeline and scope of Barnier’s proposal.

“The commission’s proposal confers on the ECB tasks concerning prudential supervision in relation to all euro-area credit institutions,” Draghi said in a Nov. 6 letter to European Parliament member Nuno Melo. “This is essential to ensure a stable financial system and a level playing field.”

Draghi also said in a speech in Frankfurt yesterday that countries shouldn’t let concerns over cost-sharing interfere with the oversight plan. EU leaders have said setting up effective supervision would help break the bank-sovereign link that has prolonged the crisis, by opening the door for direct bank bailouts from the euro area’s rescue fund.

Capital Flows

“Financial union is essential in a single-currency area where cross-border capital flows can lead to credit booms and other imbalances -- and where the negative effects of a bust can spread rapidly to other members,” Draghi said.

“Financial union does not have to imply the pooling of deposit-guarantee schemes, an issue that I know is of concern in this country,” he said. “Organizing and funding deposit-guarantee schemes can remain a national responsibility, with comparable effectiveness.”

The EU has put long-term visions of shared deposit guarantees on the back burner. Near-term efforts to ensure adequate programs in every country also have foundered because of opposition to any links among the individual national backstops.

Barnier in June proposed a network of national funds to stabilize failing banks, which he described as an interim step to pave the way for more ambitious measures. The plan would allow the national backstops to borrow from each other as a last resort and would require them to join forces to stabilize a struggling cross-border bank.

Even this move proved controversial, and separate, even less-ambitious efforts to network national deposit-insurance funds have stalled. Germany and Sweden, two EU nations that already have pre-financed funds, both called for the linking plan to be scrapped, while Barnier’s various proposals have been supported by Italy and France.

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