EU panel sets September 11 for bank regulation

The European Commission on Friday set a target date of September 11 to announce proposals to overhaul banking regulation in Europe, a key step in shoring up the Euro zone against future crises.

The establishment of a new pan-European regulatory system is a precondition for countries that use the euro to tap European bailout funds to recapitalise their banks without taking on more sovereign debt — breaking the so-called doom loop in which frail banks can endanger national finances and push countries toward full bailouts.

Spain, which has won approval for a multibillion-euro recapitalisation of its banks, has already indicated it would like to avail itself of euro bailout funds. European leaders, including Chancellor Angela Merkel of Germany, have made it clear that countries wishing to use bailout funds to recapitalise banks directly would only be able to do so once there was better supervision and control over the banks that benefited from such rescues.

The commission, the EU executive body, was charged with drafting the banking proposals after European Union leaders, at a summit in June, committed to giving the European Central Bank a leading role in the new supervisory system.

To work properly, the new banking regulator will need far greater powers than the existing European Banking Authority, which is only about two years old. That authority lost credibility after it conducted two rounds of stress tests on European banks but failed to highlight the sector’s looming problems, particularly those in Spain.

In a statement, the commission said it would lay out the new supervisory role for the ECB, which is based in Frankfurt, and its relationship with national supervisors. Putting the ECB in charge could dramatically diminish the scope for political interference in banking regulation in Europe by reducing the ability of countries to protect favoured lenders.

The commission also said it would address whether banks outside the euro area would also fall under the purview of the new system, and to what extent the existing agency, the EBA, which is based in London, would maintain a supervisory role.

The commission said its goal was to make the proposals on September 11, but that the date still needed final confirmation. It said the new system to enter into force early in 2013 although analysts have indicated that there could be delays.

One of the thorniest questions the commission must answer is how many banks the ECB will oversee in the euro area, and whether those banks would include politically sensitive lenders like savings banks in Germany.

The proposed banking regulations will still be “subject to debate and agreement among the member states, and that is likely to prove contentious,” Mujtaba Rahman, a Europe analyst for the Eurasia Group, wrote in a briefing note on Thursday.

Because “many difficult issues remain,” the result is that “implementation could be delayed, in turn delaying the direct recapitalisation of Spanish banks,” Rahman wrote.

Another key step in the process of shoring up the euro is the authorisation of a permanent European bailout fund, the European Stability Mechanism, or ESM, to succeed the current temporary bailout fund, the European Financial Stability Facility. The permanent fund, capitalised at €500 billion or $625 billion, was due to come into operation over the summer but is now awaiting a decision on its legality by the German constitutional court, due on September 12.

The delay in establishment of the ESM is also holding up action by the European Central Bank to buy bonds of troubled euro countries in an effort to bring down borrowing costs and help them refinance their budgets. The ECB president, Mario Draghi, said earlier this month that the central bank was working on a bond-buying plan, but the bank is thought to be unwilling to proceed without the bailout fund in place.

© 2012 The New York Times News Service