Commission lays ground for banking union

Closer supervision and integration is needed at EU level to avoid future banking crises, restore confidence in the financial system and protect savers, announced the European Commission, adding that “simple coordination is no longer enough”.

While banks have been increasingly operating across borders, overviewing of their activities has remained national. A shared currency and close financial integration make the eurozone particularly vulnerable to banking crises spilling over from one EU country to another.

The solution, the Commission believes, is greater supervision at EU level. Three supervisory bodies were set up in 2011 to help coordinate the work of national regulators and ensure EU rules are applied consistently.

However, a new proposal, announced by the European Commission on September 12, would see the European Central Bank (ECB) gaining new powers to monitor the performance of around 6,000 banks in the eurozone. The arrangement would be known as the single supervisory mechanism, said the Commission.

The ECB would take over tasks such as authorising banks and other credit institutions, ensuring they have enough (liquid) capital to continue operating even when sustaining losses, and monitoring the activities of financial conglomerates.

If a bank breaches – or is at risk of breaching – capital requirements, the ECB would be able to ask the bank to take corrective action.

A single rulebook on capital requirements, standardised deposit protection schemes and new recovery and resolution provisions – all proposed earlier in the year – would complete the ‘banking union’.

The ECB would start the process in January 2013, monitoring some of the banks that have received or requested bailouts from the public sector. All banks would then be supervised by January 2014.

This proposal is the latest in the line of EU initiatives to ensure that the bloc avoids a repeat of the 2008 banking crisis. As well as setting up EU-level supervisory authorities, the EU has also moved to introduce capital requirements for banks, restructure the financial sector by closing non-viable banks and introduce guarantees for bank deposits.

Source: European Commission