ECB To Oversee All EU Banks

For long, European countries have been racked by a sovereign debt crisis. Over the process of finding a long-term solution to these problems, a lot of criticism over the structure of the European Union itself has come to the fore. While there already is a great amount of synergy in the areas of trade, policy and currency within the union, there is also a strong school of thought gravitating towards a unified banking system and monetary policy.

On Dec 13, 2012, the European Finance Ministers took a step towards bringing the region’s largest lenders under a single supervisory authority. The European Central Bank (ECB) was chosen to act as the regulatory body for the European banking system from 2014 onwards. After much discussion, it was decided that the ECB will:

Take direct supervision of all banks with either more than 30 billion euros in assets or those which represent more than 20% of the country’s economy

1. Rely on local regulatory authorities to oversee the majority of Europe’s 6000-plus banks
2. Have the authority to intervene at signs of trouble in the case of smaller banks
3. Take a call on making banks raise capital buffers
4. Have the authority to close unsafe lenders
5. This would translate into a coverage area of over 80% of the Euro area banking assets and at least 180 firms.

While this development is towards improving the efficiency of the Union and its banking system, there has been criticism about the potential conflict of interest that such a move would bring in. Germany’s Bundesbank has warned of an erosion of inflation-fighting credibility with this added responsibility. Considering this view, the European leaders have agreed that the ECB’s monetary tasks would be strictly separated from its supervisory tasks.

This development is touted as being a step closer towards working on the root cause of Europe’s debt crisis. It would certainly control the aggressiveness of banks and help reduce the pressure on struggling governments. However, despite this positive step, the Euro zone faces a series of issues in the short term. Factors like opposition from rich countries like Germany, Finland and Netherlands, the return of former Italian Prime Minister Silvio Berlusconi onto the political stage, elections in Germany and the recession in Europe and Spain’s heavy financing requirements would definitely be hindrances in the path of progress.