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European Union bank oversight startup to be slow

An EU move to appoint a single banking supervisor for the 17-nation Eurozone is delayed, reflecting the difficulty of getting agreement on a unified plan for addressing the debt crisis.

October 19, 2012|By Henry Chu, Los Angeles Times
  • Jean-Claude Juncker, left, Luxembourg's prime minister, greets Demetris Christofias, president of Cyprus, before the second day of the European Union summit begins Oct. 19.
Jean-Claude Juncker, left, Luxembourg's prime minister, greets… (Jock Fistick / Bloomberg )

LONDON — European leaders took a step forward Friday in their effort to put all of the Eurozone's banks under central oversight but sketched out a time frame that suggests the new system will not be up and running until months after its anticipated start date.

An agreement in June to appoint a single banking supervisor for the 17 nations that use the euro was hailed as a major weapon in the fight against the region's persistent debt crisis. Stronger oversight would pave the way for ailing banks to receive help directly from Europe's bailout fund, without governments having to step in with aid that then worsened their own budget problems.

But at the end of a lengthy negotiating session in Brussels, weary leaders said early Friday that only a legal framework for the new supervisor would be in place by Jan. 1, with full operation not expected for several more months, or possibly not even until 2014.

The indefinite start-up date reflected the continuing difficulty of getting so many countries to agree on a unified game plan — most notably, in this case, Germany and France, the Eurozone's main drivers. That the euro crisis has quieted somewhat over the last several weeks also appears to have dulled officials' sense of urgency, despite the possibility that investors could react badly and swiftly catapult Europe into the danger zone again, analysts said.

Of biggest concern at the moment is Spain, the Eurozone's fourth-largest economy. Spanish banks need tens of billions of dollars in assistance to cope with a real-estate bust; the government is desperate for the money to come directly from the European bailout fund rather than out of its own dwindling coffers.

Madrid is worried that any big increase in its debt load would force the government to also seek a humiliating rescue. Most analysts expect Madrid to request some sort of aid from its European partners anyway by the end of the year, but it does not want the extra burden of having to prop up its troubled banks.

"The objective is simple: We want to break this relationship between the management — often the poor management — of banks and the consequences for state budgets," Belgian Prime Minister Elio Di Rupo said.

Despite the halting progress toward instituting a central banking regulator and a so-called banking union across the Eurozone, French President Francois Hollande declared Friday that the most perilous days of the euro debt crisis were over.

"The worst is behind us," he told reporters, though many investors are likely to disagree. "We are on track to solve the problems that for too long have been paralyzing the Eurozone and made it vulnerable."

The summit in Brussels was noteworthy for behind-the-scenes wrangling between Hollande and German Chancellor Angela Merkel, a clash that contrasted sharply with her close relationship with former French President Nicolas Sarkozy.

Hollande has criticized Merkel's insistence on heavy austerity cuts in indebted nations and suggested that her reluctance to move more quickly on a banking supervisor stemmed from concern over domestic politics. Merkel, Europe's most powerful leader, is up for re-election next year.

Hollande and his allies won a victory by insisting that the new banking supervisor exercise oversight of all 6,000 banks in the Eurozone, rather than just very large financial institutions, as Merkel had proposed in hopes of sparing many of Germany's politically connected regional banks from going under the microscope.

Hollande also succeeded in putting off major discussion of Merkel's calls for a separate "budget czar" in Brussels with veto power over individual nations' spending blueprints. Merkel contends that such central control is necessary for the Eurozone to become fully integrated economically and to prevent more crises like the current one. France objects to the loss of sovereignty.

But Merkel was able to slow down the pace on establishing a banking supervisor, and even hinted that the Jan. 1 target date for a legislative framework might turn out to be too ambitious.

James Goundry, an analyst with IHS Global Insight in London, said in a note to investors that the actions in Brussels amounted to a typical "fudge" by Europe's divided leaders. He said that more substantive steps are likely to emerge from the next European summit in December.

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