EU Leaders Agree On Bank Oversight Amid Merkel Questions

German Chancellor Angela Merkel said it’s an open question whether European policy makers can meet the deadline they’d set hours earlier to establish a euro-area bank supervisor by year-end.

“There are complicated questions to clarify and we’ll see in December if we complete it or not,” Merkel told reporters after a two-day European Union summit in Brussels wrapped up today. “For now, the political will is there.”

The comments underscore Germany’s go-slow approach that may stymie plans laid down in June to break the link between banks and governments that has worsened the region’s debt crisis. She also ruled out allowing Spain to shift bank-bailout loans off its balance sheet if they are made before the new system starts operating.

The European Central Bank is set to become the bloc's main financial supervisor by Jan. 1, raising the prospect of direct aid to Spain’s banks during 2013, the 27 EU leaders agreed at the gathering. The system will phase in and could cover all 6,000 euro-area banks by Jan. 1, 2014.

The so-called banking union dominated talks at the 20th crisis-fighting European summit, nailing down a formula that Merkel and French President Francois Hollande worked out yesterday before the chiefs convened. Leaders praised Greece for its budget-cutting efforts aimed at securing its next aid installment. They sidestepped questions of when and how Spain might secure further assistance.

No Pressure

Spanish Prime Minister Mariano Rajoy said he’s not facing pressure to seek a sovereign bailout and he wouldn’t take any such pressure into account in any case. Spain already has secured a 100 billion-euro ($130 billion) financial-sector lifeline and has so far not sought to ask for aid that would unlock ECB bond-buying.

“I’m not going to take into account any pressure that people might exert on me, but frankly no one is doing that,” Rajoy told reporters. “I don’t see any European Union leader telling me I should use the mechanism the ECB has put in place.”

Spanish 10-year bonds pared gains today after Rajoy downplayed the prospect of a bailout. The yield on the securities was little changed at 5.34 percent at 1:55 p.m. in Brussels. It fell to as low as 5.26 percent, the lowest level since April 2. The euro slipped 0.2 percent to $1.3042.

Implementation Process

The banking supervisor can “probably be effectively operational,” allowing the euro bailout fund to lend directly to banks as soon as 2013, EU President Herman Van Rompuy told reporters around 3:20 a.m. today after the first round of summit meetings. He said finance ministers will design rules for such bank rescues.

Merkel said the bank-oversight system needs to reach “practical completion” before direct aid becomes possible. She told reporters her nation would oppose any initiative to transfer recapitalization efforts from Spain to the euro area’s firewall fund.

“There won’t be a retroactive direct recapitalization, but once recapitalization is possible, it will be for recapitalizations that come in the future,” she said.

The EU has struggled to maintain the momentum of its June plan to spur investor confidence by putting the ECB in charge of lenders across the euro area and other nations that choose to sign on. Divisions have flared over the scope of the ECB’s authority and how losses would be shared.

Carsten Brzeski, an economist at at ING Groep NV in Brussels, said the “integration pace remains slow.”


“The new single supervisory mechanism will come, but direct bank recapitalization looks very unlikely any time soon,” he said. “Moreover, all other big-picture issues for deeper euro-zone integration remain schematic. Last night’s marathon session again illustrated how cumbersome and difficult the European decision-making process is.”

Rajoy wants the euro area’s firewall to inject cash directly into its ailing banks, to relieve it of the burden of paying back the bank-rescue loans, none of which has been disbursed. The prospect of direct bank rescues became less urgent after stress tests revealed that Spain’s lenders required less than half of the funds approved by euro-area states, a Spanish official told reporters in Brussels.

Spain’s Needs

Spain estimated on Sept. 28 it may need about 40 billion euros to recapitalize its banks. The government has played down the necessity of seeking additional aid while pushing for progress on a European banking union.

“The direct recapitalization of banks can take place when the banking supervision process is in place and approved by the euro group,” Rajoy told reporters. “I don’t know when that will be.”

The EU leaders vowed to ensure that the single supervisor won’t put countries outside the euro area at a disadvantage. They said non-euro nations that join the supervisory framework can receive “equitable treatment and representation,” and intensive technical work in this area will continue.

The decisions don’t settle the question of when the European Stability Mechanism will be able to recapitalize banks directly. The plan calls for the supervisor to take charge of big banks and bailed-out institutions first, while also saying direct assistance requires “effective” supervision in place.

“What’s important is that we agreed that the legal framework which will make the banking union possible, should be decided by finance ministers by Jan. 1,” Luxembourg’s Prime Minister Jean-Claude Juncker told reporters today. “The detailed questions of what should be done how, when and by whom will be tackled in the course of 2013. I hope in the first quarter but it can get dragged into autumn.”