The European Commission plans to have one
supervisory body to oversee the 6,000 banks in the eurozone. The
following is an outline of the plan drafted by the European Union's
- Why does the eurozone need joint bank supervision?
Banks are currently regulated by national authorities. But given their role in the global financial crisis - precipitated by the collapse of US investment giant Lehman Brothers in 2008 - many argue that more control over lenders is needed.
Eurozone banks should be monitored by a supranational regulator focused on the stability of the currency area, advocates of the approach say.
"Self-regulation and light-touch supervision just do not work in the financial sector," German Finance Minister Wolfgang Schaeuble recently wrote in the Financial Times newspaper. "Left to its own devices, the market will self-destruct."
Joint supervision is also considered the first plank in creating a eurozone banking union - a move seen as key for restoring trust in the crisis-battered region. The supervision aspect was tackled first because it does not require treaty changes.
Eurozone leaders set the wheels in motion in June by making the creation of a joint supervision mechanism a pre-condition for their bailout fund to directly recapitalize troubled banks.
- How would the supervision work?
The commission would like the fiercely independent European Central Bank (ECB) to carry out the work. A new board would be created within the institution, so that its supervisory and monetary policy tasks are kept strictly apart. Media on Tuesday speculated that ECB Vice President Vitor Constancio would be put in charge.
The new supervisor would be accountable to the European Parliament and eurozone member states. Its powers would include authorizing credit institutions, carrying out stress tests, imposing capital requirements and monitoring risks to banks' viability.
National authorities and the European Banking Authority would be subordinate, but would continue to play a role since the commission acknowledges that the ECB does not have the capacity to closely monitor all of the 6,000 banks on a daily basis.
The commission envisions the new system applying to all 17 eurozone member states, with the other 10 EU countries who do not use the common currency able to opt-in if they wish to do so.
The supervision mechanism would first cover banks that have tapped into eurozone bailout funds from January 2013. It would then be expanded to banks considered most systemically important in July 2013, followed by all eurozone banks from January 2014.
But EU member states and the European Parliament will have to give their blessing to the approach first.
- Are there obstacles to approving the proposal?
The commission could face headwinds from eurozone heavyweight Germany, which has insisted that the new system would only be efficient if it is restricted to systemic banks - major lenders whose downfall would endanger the whole banking system.
The EU's executive has refused to budge, however, pointing out that banks previously considered unsystemic have already posed problems in the eurozone - most notably Britain's Northern Rock, Spain's Bankia and the Franco-Belgian-Luxembourgish Dexia.
A showdown is also brewing with the 10 non-euro countries, as some worry that the banking supervision proposal will set a precedent for a "two-speed Europe." They have been keen to not be cast aside in the fight against the eurozone crisis, which has also affected them.
Their support for the supervision proposal is key, since it requires unanimity among all 27 EU member states to become law.
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