Eurozone agrees common bank supervisor

Europe took its first big step towards banking union early on Thursday morning, as eurozone finance ministers agreed a plan to cede power to a common bank supervisor in Frankfurt.

After almost four months of fraught diplomacy that laid bare deep Franco-German divisions, finance ministers brokered terms for the European Central Bank to begin direct supervision of up to 200 eurozone lenders from early 2014.

The reform requires governments to surrender jealously guarded control over national banks, in the most concerted financial integration project since the creation of the single currency.

At the same time, Britain, Sweden and other non-eurozone countries outside the banking union won coveted safeguards to check the power of the ECB and maintain some influence over technical standards applying to all EU banks.

The supervision plan is the first – and probably the easiest – step towards a eurozone banking union designed to shore up confidence, resuscitate cross-border bank lending and bring down painfully high borrowing costs for banks in peripheral eurozone countries.

Germany’s willingness to give some ground paved the way for a deal that beats the EU’s self-imposed year-end deadline.

Michel Barnier, the EU commissioner responsible for the proposal, hailed a “historic agreement” providing a “fundamental element for financial stability in Europe”.

But during the talks, Wolfgang Schäuble, the German finance minister, made plain that one of the key purposes of the reform – to allow common resources in the eurozone’s €500bn rescue fund to be injected directly into ailing banks – was out of the question until well into 2014.

“Again and again we have created expectations we cannot fulfil and that is very dangerous. We should be modest,” Mr Schäuble said, in a clear warning to countries that regard the creation of a central supervisor as a stepping stone to more risk-sharing.

Overcoming the most difficult outstanding issues took about 12 hours of talks, stretching past 4am on Thursday. About four hours were spent attempting to bridge differences between Paris and Berlin, according to officials involved.

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European banking union

Analysis of the politics of a proposed bank union in Europe and the entrenched interests from London to Berlin

Under the compromise, the ECB will have direct responsibility for banks with assets of more than €30bn, or representing more than a fifth of a state’s national output.

This definition covers between 150 and 200 banks, according to French officials, but leaves most of Germany’s retail banking sector – and its politically powerful network of savings banks – in effect under the ambit of the German national authorities. Every eurozone country will have at least three banks directly supervised from Frankfurt.

However, the ECB retains the power to intervene in any bank and deliver instructions to national supervisors. EU officials insisted the system was built around a single line of authority, with the ECB setting the day-to-day operating procedures for all supervisors.

While the compromise could permit all sides to declare political victory, it remains unclear whether the details in effect establish a two-tier regime or give the ECB ultimate responsibility for all banks.

Pierre Moscovici, the French finance minister, expressed his approval for what he said was a “good working balance”.

Berlin also won concessions on the timing of implementation, so that no fixed deadline is included in the text for the ECB to take direct oversight of the biggest banks.

There remains, however, a series of specified goals that could reduce the transition period to as little as a year, meaning the system could be up and running by March 2014.

Mr Barnier pointed out that under existing rules there was – subject to unanimous approval – the potential for direct recapitalisations to take place, even before the ECB fully establishes its supervision regime in 2014.

A clause inserted into the text would allow the ECB to take over supervision of a lender at the request of the European Stability Mechanism, the eurozone bailout fund. This paves the way for an emergency injection of capital but would require unanimous approval.

Another major point of friction was over the rights of non-eurozone countries, both inside and outside the banking union. A series of complex provisions were included in an attempt to assuage the legal restrictions that prevented non-eurozone members of the banking union holding full voting rights within the ECB.

However, these proved insufficient for Sweden and the Czech Republic, which made clear they would not join the banking union in the near future.

Eurozone countries eventually dropped objections to UK-led demands for a “double majority” principle at the European Banking Authority, the EU agency coordinating the work of national supervisors.

This ensures that any EBA decisions are at least approved by a plurality of countries outside the banking union – a principle with potentially wider application as Britain seeks to coexist within the single market with a more integrated eurozone.

George Osborne, UK chancellor, said it had been “a long night of negotiation” in which Britain had emerged with “a very good deal”.

“We wanted to make sure the single market was protected . . . that has been achieved,” Mr Osborne said.

A showdown between big and small countries over the voting arrangements for setting regulations within the banking union emerged as the final outstanding issue. Luxembourg and Austria led objections to scrapping the ECB’s one-country, one-vote principle in favour of weighted votes that gave greater clout to France and Germany.

The final compromise involved combining both voting procedures, so a simple majority and a weighted majority would be required for any decision.

The package will still require approval from the EU parliament and the German Bundestag, a process that could take several months.