European leaders seal agreement to put the European Central Bank in supervisory authority over financial institutions in the single currency area
European leaders were expected to push ahead with plans for winding up or shoring up weak eurozone banks on Thursday night, hours after sealing agreement to put the European Central Bank in supervisory authority over financial institutions in the single currency area.
In what was being hailed as one of the most important and systemic responses in three years of battling to save the currency, finance ministers early on Thursday embarked on the first stage of a eurozone "banking union", burying acute Franco-German differences to establish the first single banking supervisor.
A two-day summit which opened on Thursday sought to build on the momentum, discussing calls for new legislation on eurozone banks' "resolution" to be drafted by next year.
But more ambitious schemes, drawn up by the summit chair, president Herman Van Rompuy, to move towards a eurozone fiscal and political federation were watered down and delayed amid strong German resistance to any pooling of risk and costs among the currency's 17 countries.
A draft communique on the summit's decisions said that a "single resolution authority will be required, with the necessary powers to ensure that any bank can be resolved with the appropriate tools."
The European commission, according to the draft, was told to draw up legislation for dealing with weak banks over the next year and the law should come into force in 2014. There was also talk of a common eurozone deposit guarantee scheme, the third plank in the banking union scheme, safeguarding people's savings anywhere in the single currency area.
The Germans are balking at that notion, however, and are also wary of pooling responsibility for weak banks in other countries as the common scheme would see German banks being taxed to pay for bad banks elsewhere.
"Common bank resolution is difficult for them," said a senior diplomat, adding that the Dutch and the Finns, hawkish allies of the Germans on the euro crisis, were also reluctant to take on "mutualisation" of risk in the eurozone.
Berlin has told Brussels to steer clear of tabling proposals on eurozone risk-sharing and cost-sharing before chancellor Angela Merkel contests an election for a third term next September.
The proposed banks resolution regime is supposed to help cut the invidious link between failing banks and weak sovereigns that is seen as having contributed hugely to the sovereign debt crisis in countries such as Spain and Ireland.
"The single most important integrative step for the eurozone in 2013 is going to be the work to create a common resolution authority," said Mujtaba Rahman, European analyst at Eurasia Group.
Under the single supervisory regime agreed on Thursday by finance ministers, though still to be finalised in talks with the European parliament, the ECB in Frankfurt is put in authority over up to 200 of the eurozone's 6,000 banks initially. A German campaign to restrict the scope of the supervisor won over French resistance.
After more than 14 hours of fractious negotiations, the ministers agreed on the single supervisor as the first stage of a more comprehensive banking union. The next two stages may turn out to be more difficult to realise because of German-led reluctance to bow to the mutualisation of risk involved. But without them, it will also be difficult to see the new regime being effective, officials and diplomats say.
The idea was first proposed in June when France, Italy, and Spain exploited the euro drama to hijack Germany into agreeing that the eurozone's bailout fund could be used to recapitalise directly ailing banks, say in Spain.
The Germans were arm-twisted into agreeing, but insisted the recapitalisation could only take place if eurozone banks were placed under ECB authority. Within hours of that huge concession, the Germans got cold feet and have been rowing back ever since, seeking to delay the bank supervisor and restrict its powers and scope.
It will be another 15 months before the new regime starts operating properly. Germany's finance minister, Wolfgang Schäuble, ascribed the time needed to the ECB, stressing that Mario Draghi, the ECB president, wanted a year to get the new system up and running.
The UK chancellor, George Osborne, whose key aim from outside the eurozone was to safeguard the UK financial sector against ECB and eurozone interference by being automatically outvoted on rule changes, standards-setting, and regulation, claimed he got a good deal for Britain.
"The safeguards we have secured protect Britain's interests and the integrity of the European single market," said Osborne. "We've always said a banking union was a necessary part of a more stable single currency for the eurozone, but also that single market for the whole of the European Union must be safeguarded. The agreement Britain has secured does that."
Despite the progress on common bank regulation, the summit shaped up to be a humiliation for Van Rompuy at the hands of the Germans. His earlier proposals for eurobonds have been scrapped and demands last week for a eurozone "fiscal capacity" or special budget and insurance scheme were also dropped, although the draft still talked of a eurozone "shock absorption capacity." Van Rompuy's first draft communique for the summit, envisaging a three-stage process towards a more complete monetary union, has had to be comprehensively rewritten while his proposals were belittled as a "useful input" rather than as the "basis" for the debate.
Merkel did not rule out supplying "financial incentives" for eurozone countries pledging to undertake structural reforms of their economies, policed by Brussels. But she added: "This should not be misunderstood. This can't be used as a pretext for delivering new sources of money. That's not on for Germany."
The leaders also disbursed more than €34bn in bailout funds to Greece, six months after it was due, while postponing a decision on a bailout for Cyprus until next month.
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