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Brussels will this week confront Berlin with a fast-tracked plan for a powerful eurozone bank supervisor, in the opening salvo of a battle that could dictate when the euro area can begin sharing the risk of bank bailouts.

In spite of bluntly stated German reservations, José Manuel Barroso, the European Commission president, is on Wednesday to unveil a brisk timetable to give the European Central Bank ultimate responsibility for supervising all 6,000 eurozone banks by 2014.

The reforms would mark one of the biggest surrenders of national power since the creation of the euro and are an essential first step to a fully fledged banking union, with common backstops and tools to handle failed banks.

While euro area leaders have in principle approved the creation of a single supervisor, the battle over its remit is now heating up, with implications for the EU’s broader crisis fighting efforts – including whether eurozone rescue funds can recapitalise weak banks directly.

All 27 EU member states hold a veto over the supervision reform, which officials want unanimously approved at the December summit. At this point, the most vocal concerns are voiced by Germany.

While backing a single supervisor, Berlin has fundamental concerns over the commission’s proposal: the wide scope of banks covered, the high degree of centralisation and the quick pace and sequence of implementation. Wolfgang Schäuble, Germany’s finance minister, warned the commission “not to create expectation” that cannot be fulfilled.

Beyond issues of governance, the outcome of the debate may ultimately determine if and when the European Stability Mechanism, the eurozone’s €500bn rescue fund, can pump capital into struggling banks directly – with German taxpayers on the hook.

But eurozone leaders in June said establishing a strong single supervisor was a pre-condition to direct recapitalisations – making the battle over supervision reforms a pivotal element of how the eurozone crisis unfolds.

The commission is determined that no bank is beyond the reach of the eurozone’s single supervisor, be it a global investment bank, a Spanish caja or tiny German savings bank. “We know that all banks can cause problems,” said Michel Barnier, the commissioner responsible for financial regulation, speaking this weekend.

Drafts of the proposal gives the ECB responsibility for all banks and ultimate prudential responsibility. Under this central authority, some supervision tasks would then be delegated to national authorities.

Mr Schäuble is determined the single supervisor is robust in practice, and not just a token regime on paper. He has said focusing on banks with systemic importance is “common sense” as no watchdog could be “realistically expected” to directly supervise all 6,000 banks with equal rigour and effectiveness.

For Berlin, a more practical suggestion is the ECB directly supervising 60 banks, while setting supervision rules for the remainder.

Senior European officials suspect this complaint reflects deeper unease in Germany over ceding national supervision power, especially over the network of politically influential savings banks.

This concern in Brussels extends to the make-up of the “ECB supervisory board”, which some officials fear is too heavily stacked with representatives from each eurozone country, effectively leaving significant power at national level.

Brussels wants a rigid timetable put in law, despite ECB requests to decide how and when the new supervision system is rolled out. According to leaked drafts, from January 2013 the ECB will be empowered to take on supervision of any bank reliant on state aid. It would then take direct responsibility for systemic banks in July and for all banks by 2014.

In the eyes of senior EU officials, this would mean the single supervisory system is established at the end of this year, opening the door for eurozone rescue funds to directly assist struggling banks, where necessary. This would be an intermediate step until a single resolution authority – which Mr Barnier is planning to propose next year – is in place.

Mr Schäuble, however, is unconvinced. He has directly warned Mr Barnier against creating false hopes in markets that European rescue funds could be used directly for banks from January.

He views the timetable as an unachievable and unrealistic. His priority is that experienced staff are hired, that the institution beds down and that the ECB’s powers of intervention are clear and proven.

Along with timing, Germany is uncomfortable with the order of implementation. Mr Schäuble last week said supervision should start “with systemically-relevant institutes, then maybe banks on the rescue programme”.

This would reverse the commission plan, leaving Irish and Spanish banks towards the back of the ECB queue on supervision, and still some distance from direct recapitalisation.

Before moving to a single supervisor, Berlin also wants a slew of existing EU proposals stuck in the legislative pipeline to be passed into law, including rules on bank capital, resolution and co-ordination of deposit guarantees.

The commission also wants the proposals passed by the end of 2012, but not as a precondition to establishing the single supervisor, a demand that could again hold up other crisis-fighting measures.

“When they insist on the supervisor being ‘established’ before anything else happens, what they mean is let’s delay,” said one EU official of the German position.

Copyright The Financial Times Limited 2017. All rights reserved.
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