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Europe fails to agree terms of new banking supervision framework

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NICOSIA, Cyprus - Europe faces weeks of tough negotiations to agree on a new region-wide banking supervisor after divisions emerged over the new body's powers at a meeting of the region's finance ministers Saturday.

The design of the new supervisory framework is widely considered to be a key part of Europe's attempts to strengthen its financial system and help bring an end to the three-year debt crisis.

On the second day of meetings in the Cyprus capital, finance ministers from all 27 members of the European Union pored over proposals unveiled earlier this week by the European Commission, the EU's executive branch. The Commission wants the European Central Bank to be given the role of supervisor and be granted sweeping new powers — from the ability to grant and take away banking licenses to extensive authority to investigate and fine wayward banks.

Many Europe-watchers and politicians have called for a "banking union" — a unified playbook for all the region's banks — to help forge a tighter EU and solve the debt crisis hitting the 17 countries that use the euro, .

The creation of a single bank supervisor is an important part of this plan and has to be in place before other measures can be considered. These include a European-wide system of depositors' insurance; a single method for winding down bankrupt banks; and allowing the European bailout fund to directly help banks in trouble, instead of lending money only to governments.

All 27 EU countries have to agree on the new framework though it will only apply to the 17-nation eurozone at first. The remaining 10 countries in the EU can join if they wish, but they won't have voting rights at the ECB because they are not members of the euro.

Though Europe has agreed in principle to the need for a new supervisor, there have been disagreements over the detail, raising doubts over the Commission's aim to have to the ECB ready to take up its new duties by the new year.

"It will not be possible," said Wolfgang Schaeuble, Germany's finance minister. Germany only wants the largest banks to be under ECB control but the Commission proposals say all 6,000 banks in the eurozone should be monitored.

Michel Barnier, the European internal market commissioner and the man behind the proposals, conceded that the timetable was "tight and ambitious" but that it was "realistic" and "necessary." Cyprus finance minister Vassos Shiarly, who was chairing the discussions, said the Cypriot EU presidency's commitment to meet the end of year deadline remains "and we will adhere to it."

However, Swedish finance minister Anders Borg said he was concerned that the eurozone countries could overrule Sweden and other non-euro countries, such as Britain, on broader issues such as imposing new capital requirements on every bank in the EU.

"We can obviously not accept to have supervision in Europe be based on the ECB where we are not members and if we did become members we would not have voting rights," Borg said. "It is unacceptable to be under supervision from an organization where we don't have a voting right."

Borg said he had some "very clear red lines" before he would agree to a compromise deal and that a large chunk of the other ten non-euro countries shared his concerns: "Our taxpayers' money must be safeguarded. We must have the ability to uphold capital requirements. There cannot be a European supervision when half of Europe doesn't have a voting right in it. That's not acceptable. It cannot stand. It will not be tolerated. That has to be changed."

Barnier said that over the coming few weeks, his team would work on how to deal with the voting concerns raised by Borg.

Similarly, ECB vice-president Vitor Constancio said he understood Borg's worry over voting rights and that this point "will be discussed in the near future."

The first day of the informal meetings on the east Mediterranean island was dominated by discussions over the financial future of Greece and Spain.


Menelaos Hadjicostis and Nicholas Paphitis contributed to this article.

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