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27th Aug 2016

Ministers agree deal on EU banking union

  • The ECB will start supervising banks in 2014 (Photo: Maciej Janiec)

EU finance ministers have agreed a landmark deal establishing the European Central Bank (ECB) as the single supervisor of the European banking sector, beginning in 2014.

The agreement reached in the early hours of Thursday morning (13 December) is a significant breakthrough as the EU bids to break the link between indebted banks and sovereign bonds nearly five years after the start of the financial crisis.

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It also makes good on an EU leaders' promise to agree on the supervisory framework before the end of 2012.

Ministers will now switch their attention in 2013 to harmonising a deposit guarantee scheme and a resolution mechanism to wind up banks.

Speaking at a press conference following the end of the talks, internal market commissioner Michel Barnier told reporters that ministers had taken "a big first step for banking union," adding that "the ECB will play the pivotal role, there's no ambiguity about that."

German finance minister Wolfgang Schaeuble told reporters: "We have reached the main points to establish a European banking supervisor that should take on its work in 2014."

Delaying the implementation date to 2014 is a blow for member states keen for the ECB to start work immediately. Leaders at the October EU summit had indicated that the so-called Single Supervisory Mechanism (SSM) would come into force in 2013.

Under the final compromise, which is expected to encompass around 150 banks, at least three banks from each member state will fall under the regime alongside all banks with assets worth €30 billion or more or 20 percent of national GDP.

The ECB also has a broad mandate giving it the power to step in to prop up smaller banks. A mediation panel will be created to resolve disputes with national supervisors.

For their part, national supervisors will remain in charge of consumer protection, money laundering and payment services.

Meanwhile, the existing European Banking Authority (EBA) - itself only established in 2010 - will remain responsible for developing the single rulebook and policing implementation of EU supervisory rules.

In a bid to placate German concerns about the independence of the ECB, a special supervisory board will be set up within the bank to separate the bank's monetary policy role from bank supervision. Non-eurozone countries who sign up to the banking union are to have equal voting rights on the supervisory board.

Similarly, the voting system of the EBA will also be revised to ensure that the countries participating in the so-called single supervisory mechanism (SSM) would not dominate the EBA's board of supervisors.

Ministers agreed that a 'double majority' of countries both in and outside the eurozone would be required to make decisions. The board's draft decisions would be deemed adopted unless rejected by the ECB governing council.

Some key questions remain unresolved, however.

Ministers did not reach a conclusion on the timetable for the European Stability Mechanism - the permanent eurozone bailout fund - to begin direct recapitalization of eurozone banks.

Although Spain and other countries would like bank bailouts to begin in early 2013, Germany is against this happening before the supervisory regime is in place and fully operational.

For his part, finance minister Vassos Shiarly, from EU presidency country Cyprus, described the SSM deal as a "magnificent result" and a "Christmas present for the whole of Europe," adding that it would "enable the vicious link between banks and sovereigns to be broken."

He told reporters that formal "trialogue" negotiations would begin next week with MEPs led by Belgian centre-right deputy Marianne Thyssen and German Green Sven Giegold.

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