EU to propose steps to keep ECB from dominating regulator

LONDON Sun Sep 9, 2012 4:45pm EDT

LONDON (Reuters) - The European Union will propose a panel of experts to adjudicate banking rule breaches, as an extra layer of protection so that the European Central Bank cannot impose its will on the pan-EU banking regulator when the ECB takes over supervision of euro zone banks.

Under a proposed banking union for the euro zone countries, the ECB is meant to take over primary supervisory power for the 6,000 banks in the 17 countries using the euro.

But the 10 EU countries which do not use the single currency - including Britain, the EU's biggest financial centre - fear that would allow the ECB to impose its will on the European Banking Authority, the regulator for the entire 27-member bloc.

The EBA decides rules for EU banks based on "qualified majority" voting, which depends on the size of member countries. It deals with rule breaches and action in emergency situations under a system that gives each country a single vote.

A draft law that EU Commission President Jose Manuel Barroso will unveil on Wednesday, seen by Reuters, says the ECB "will coordinate the position of euro area members of the EBA... in supervisory matters," suggesting euro zone states would vote as a bloc.

However, the EBA would employ a committee of impartial experts to rule on breaches of EU banking rules by any member state and on actions taken in emergency situations, and the EBA would have to hold a formal vote to overrule them.

That "will ensure that euro area member states cannot have a blocking minority in case of actions taken against one of them", the draft law said.

It was not immediately clear whether the safeguards outlined in the draft law, if approved, would be enough to ease concerns in Britain that the euro zone countries would ride roughshod over the bloc's banking rules.

EBA REMAINS A PLAYER

The draft reveals that the London-based EBA will remain a significant player after the supervisory shake up, easing concerns that the ECB would simply swallow up the watchdog, which would erode national and pan-EU supervisory powers.

Germany had wanted to see the EBA downgraded, privately citing disappointment with its efforts to "stress test" EU lenders, which failed to reassure markets and investors.

Britain sought safeguards to stop the euro zone banking union countries from blocking pan-EU rules and unfairly bolstering euro zone lenders.

Big, cross-border banks who have operations inside and outside the euro zone are worried about regulations becoming fragmented by overlapping authority between the ECB and EBA.

The draft proposed by Barroso is likely to see changes by EU states and the European Parliament, who have the final say, before it becomes law sometime in 2013.

Among other safeguards in the law, the EBA will be required to include two non-euro countries on its six-member management board.

The EBA will also have "powers to act in cases the ECB does not intend to comply with an EBA decision," the document said.

The central bank would have to "explain its reasons" if it refuses to comply with an action by the EBA to settle a disagreement or address an emergency situation.

"In that unlikely case... EBA can adopt an individual decision addressed to the financial institution concerned."

(Editing by Peter Graff)

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