Debate about bank supervision

In a long and drawn-out night session at the EU summit at the end of June, the 27 heads of state and government of the European Union agreed to establish a banking union. The first step was to be the establishment of a supranational regulator to supervise eurozone banks by January 2013. Back in June the deal was summed up in just a few sentences - now, the EU's finance ministers were faced with sorting out the tricky details.

"One of the weaknesses that we see in the eurozone is the spiral between banks that need to be rescued, and the growing sovereign debt," Guntram Wolff from the Brussels-based Bruegel think tank told Deutsche Welle. In Ireland and Spain for instance, governments had to take on massive debts to rescue their country's struggling banks.

"The idea behind a banking union is to break up this dependency," Wolff explained. "The goal is to avoid that banks' debts can turn into sovereign debts and that potentially the country itself can go bankrupt."

Common supervision only a first step

The European Commission has now made a concrete proposal on how to go ahead. The banking union is to consist of a common supervisory board, a risk and crisis management, a common guarantee fund for savings deposits and fund for winding down ailing banks.

Risks incurred in the bank rescue process are to be shared on the European level. At the end of the process, even the guarantee of savings deposits would be standardized and organized on the EU level. In an extreme scenario, this would mean that Germans would be liable for Greek banks, and that Greeks in turn could be liable for ailing banks in Germany.

But joint liability won't happen over night: several eurozone members don't even have their own deposit guarantee funds yet - and EU Commissioner for Internal Market and Services Michel Barnier stressed that this would be necessary precondition before any kind of joint liability could be established.

High expectations

In Nicosia, German Finance Minister Wolfgang Schäuble was far from enthusiastic about any form of common liability. He urged not to move too fast and warned of creating expectations that cannot be met.

Above all, he cautioned about the establishment of a common supervision of the more than 6000 banks operating in the 17 eurozone countries. Warning the job should be done properly rather than hastily, he said he didn't believe a common supervision could be up and running by January 1, 2013. "We all agreed that announcing a fixed date is not a good idea if you're not sure whether you can actually stick to it."

In Cyprus, Barnier admitted that it was best to move in small steps but defended the plan's timeline as "ambitious, demanding, realistic and necessary." He added though that not every banks would be affected immediately, suggesting that only by 2014 all banks would effectively be under joint supervision.

But there's not even agreement as to whether really all banks need to be under supranational supervision. Germany's Schäuble for instance remains convinced that only a part of the country's financial institutions should be supervised centrally, while the larger number of Germany's small savings banks and mutual savings and loans institutions should remain under national supervision.

ECB as supervisor?

It still needs to be decided where the new supervisory authority would be based but the majority of ministers backed a proposal to hand the task to the European Central Bank (ECB) in Frankfurt.

German ECB board member Jörg Asmussen confirmed that the bank was ready and willing to do the job - but many details still need to be sorted out. To avoid possible conflicts of interest, there would for instance need to be a strict separation between the current task of the ECB and its future supervisory function. If the supervisor decided to wind down a certain bank, for instance, the ECB would be faced with losses because of the loans it might have given to the bank in question.

There's also a discussion over who should be on the board of the supervisory institution: national representatives from each eurozone country, or a small flexible team? And there also is the question of how to supervise the supervisors: In a resolution passed this week, members of the European Parliament urged for democratic control mechanisms and said they expected to be involved in setting up the bank supervision.

Should the MEPs indeed insist on that, delegates in Nicosia admitted that it would be unrealistic to stick to the January 1 timeframe.

'Fundamental problems'

Yet governments whose country's banks are facing massive problems have been pushing for a speedy process. They know that banks can directly apply for help from the rescue fund ESM, as soon as the European bank supervisor is operational. The debate is now whether ailing banks will have to be bailed out first before being placed under European supervision. Should that not be the case, the cost of the bailout would have to be shared by all eurozone countries.

Another hurdle is that the European banking union has to be adopted by all 27 EU member countries - and not just by the 17 eurzone states sharing the single currency. But Swedish Finance Minister Anders Borg in Nicosea warned there were "fundamental problems" in the whole project.

Sweden doesn't see why the European Central Bank – supposedly the guardian of the euro – should become the supervisor for Swedish banks that run their business in Swedish krona. Great Britain and Poland are also deeply concerned. In the end, German Finance Minister Wolfgang Schäuble had this summary to offer: "There's still a lot of work ahead of us. But there's no doubt about the goal of finding a common solution."