EU Reaches Deal on ECB Oversight Powers Over Euro-Area Banks

European Union lawmakers and national governments clinched a provisional deal on legislation to turn the European Central Bank into a supervisor, a move that would pave the way for the currency bloc’s firewall fund to provide direct bailouts to banks.

Members of the European Parliament and officials from Ireland, which holds the rotating presidency of the EU, brokered an accord today after five hours of talks in Brussels. The agreement hands lawmakers a role in appointing the head of the ECB bank supervision board and equips the European Banking Authority with stronger powers to request information from national regulators.

“This is the largest step toward integration since the euro,” Sven Giegold, a German legislator who negotiated for the parliament on the law, told reporters. “It will break with the culture of soft-touch regulation.”

EU leaders called for the new supervisor as they sought to tame a fiscal crisis that has forced Greece, Portugal, Ireland, Spain and most recently Cyprus to seek international aid. The move is part of a broader plan to build a so-called banking union that may also include a central authority for resolving failing lenders, due to be proposed later this year.

One-Time Levy

Cypriots woke up on March 16 to find bank transfers frozen as the country’s authorities prepared to tax accounts as part of a rescue package thrashed out by euro-zone finance ministers. The agreement remains in limbo as Cypriot lawmakers weigh whether to approve the deal amid warnings from the country’s president, Nicos Anastasiades, that tough measures are needed to avert the collapse of the banking system.

The ECB this week has been one of the leading voices calling for depositors in Cyprus to accept the one-time levy, intended to raise 5.8 billion euros ($7.5 billion) alongside a planned 10 billion-euro official-sector rescue package.

Sharon Bowles, chairwoman of the economic committee, said that the ECB’s role in designing the Cypriot aid package raised concerns about how it would act once it has oversight powers.

“Central banks have to be tough sometimes, but what hope is there for accountability when they seemingly force decisions like this at gunpoint with no regard for financial legislation,” Bowles said in an e-mailed statement ahead of today’s talks. “We must question ECB independence on supervision. If anything this strengthens the case for more democratic accountability.”

Oversight Chief

Lawmakers at today’s meeting only agreed to hand the central bank supervisory powers once they won the right to vet candidates to become its oversight chief.

Under the deal, the ECB will put forward a nominee who would then need to be approved by the Parliament before a vote by governments.

Under the plans, the ECB will directly oversee around 150 banks, accounting for more than 80 percent of the euro-area banking system in terms of assets, according to the central bank’s own estimates.

The ECB will directly oversee at least the top three biggest banks of every participating nation unless “justified by particular circumstances.”

Establishing the single supervisor is a condition for allowing direct bank aid from the euro area’s firewall. Finance ministers have pledged to agree on guidelines for such aid by mid-year.

Subservient Role

International Monetary Fund staff called last week for the euro area to press ahead with setting up the single supervisor, in a bid to break a vicious circle damaging confidence in Europe’s banks and public finances. The fund also warned that the new supervisor will need to be independent from the ECB’s monetary policy role to prevent conflicts of interest and keep financial supervision from taking a subservient role.

IMF Managing Director Christine Lagarde today endorsed the rescue deal for Cyprus outlined by euro-area finance chiefs, to which the IMF may also contribute. She said Cyprus will need to shrink its banking sector as part of any rescue package.

“It is still very much a central piece of the agreement that was reached that the banks will have to be right-sized and restructured properly in order to make the whole business model sustainable going forward,” Lagarde said in Frankfurt.

EU governments have provided 1.7 trillion euros of aid for their banking systems in response to the financial crisis that erupted following the 2008 collapse of Lehman Brothers Holdings Inc. The amount is equivalent to more than 13 percent of the bloc’s economic output, according to European Commission data.

Rule Changes

The legislation to hand the ECB bank oversight powers must be approved by national governments and voted on by the European Parliament before it can take effect. The ECB will take at least a year to set up shop once the regulations are in place.

The EU is aiming for the ECB to fully take on its bank oversight role by July 2014, officials have said.

Today’s deal also includes rule changes at the London-based EBA, which co-ordinates how supervisors across the 27-nation EU apply the bloc’s rules.

Under the deal, the EBA will also be required to review annually whether a pan-EU stress test is needed of the bloc’s banks, Giegold said. It will also be tasked with drafting a handbook for regulators.

The EBA’s chairman will be given more power to put decisions at the authority to a vote if efforts to reach a consensus have failed, he said.

Before it's here, it's on the Bloomberg Terminal.