EU May Scrap Plan to Hand ECB Sole Power on Bank Licenses

EU May Scrap Plan to Hand ECB Sole Power Over Banking Licenses
Squabbling among EU nations may derail the bloc’s bid to reach agreement by the end of the year on how to make the European Central Bank a supervisor. Photographer: Simon Dawson/Bloomberg

The European Union may scrap plans to give the European Central Bank sole power to grant and withdraw banking licenses in the euro area as nations tussle over the details of setting up a single supervisor.

Some EU countries insist “that the key issue of access to and removal from the market should remain within the remit of national authorities,” for at least as long as the EU does not have a central system to handle failing banks, according to a document on the bloc’s website. The concerns mean current proposals must be revised, according to the document prepared by Cyprus, which holds the rotating presidency of the EU.

Because setting up the new supervisor is so complex, EU finance ministers also may decide to lengthen the period over which the ECB would assume its new powers. “Political guidance is needed to finalize the necessary timelines,” according to the document, which was prepared for a meeting of EU finance chiefs tomorrow in Brussels.

The squabbling may derail the EU’s bid to reach agreement by year-end on how to make the ECB a supervisor and risk stalling plans to break the bank-sovereign link that has worsened the region’s debt crisis. The supervisor must be in place before banks can receive direct aid from the euro area’s firewall funds.

Some nations seek “a more flexible phasing-in arrangement,” the document said. Michel Barnier, the EU’s financial services chief, has called for ECB oversight to phase in between Jan. 1, 2013, and Jan. 1, 2014.

U.K. Concerns

Barnier’s plan calls for the ECB-based supervisor to represent the euro area on many issues in the European Banking Authority, which coordinates financial rule-making across all 27 EU nations. This drew concerns from the U.K., which opposes measures that would allow the ECB to take a dominant role in EBA rule-making at the expense of countries outside the common supervision bloc.

The U.K. is comfortable with the direction of negotiations on how EBA voting will take shape. Cyprus is still seeking to iron out splits over EBA voting rules, according to the document.

“A number of member states consider that the voting rules should still be further (thoroughly) reviewed, and allow for additional safeguards,” according to the document. Cyprus will seek solutions so that “all competent authorities, including the ECB acting in its supervisory capacity, will be treated equally.”

‘Political Solution’

Other areas of disagreement include how to give a voice to non-euro nations that volunteer for ECB supervision and how to divide up tasks between the ECB and national regulators, according to the document.

ECB President Mario Draghi and Eurogroup President Jean-Claude Juncker have called for the single supervisor to be the first step in a banking union, which would eventually have coordinated backstops for handling failing banks.

“Whatever political solution is found in the near term to paper over the various disagreements, progress towards a bank union will be a very long and tortuous process, subject to much argument and amendment,” Richard Reid, research director for the International Centre for Financial Regulation in London, said in an e-mail.

“The longer this process takes of course, the more uncertainty it creates for financial markets and, of course, for Europe’s debt crisis,” he said.

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