Regulator warns banking union could split Europe

BRUSSELS Wed Sep 19, 2012 1:41pm EDT

BRUSSELS (Reuters) - Plans to create a European banking union risks a supervisory split between countries in the euro zone and those outside, Europe's top bank regulator said on Wednesday, warning of his concerns about the latest plan to tackle the financial crisis.

Last week, the European Commission unveiled plans for the European Central Bank to supervise all euro zone banks as an initial step towards a banking union, a proposal that has divided opinion within the euro zone and worried neighboring states who fear their banks will be indirectly affected.

Speaking to lawmakers in the European Parliament, Andrea Enria, the chairman of the European Banking Authority, warned that the union, forming a united front among euro zone countries to protect their lenders, risked seeing one set of rules applied to banks under the ECB's watch and another to those outside.

"We risk a polarization ... between the euro area, with single rules and supervisory practices, and the rest of the (European) Union, which would operate with a still wide degree of national discretion in ... applying the single rulebook."

In his first public remarks since the announcement of the proposal, the Italian economist said that although banking union was something that "needs to be done now", the challenge would be "finding the right glue to keep the single market together".

His remarks reflect a concern shared by many countries that rules such as those on capital, that dictate how much banks must hold in reserve for losses, could be applied differently.

There are three major steps in a banking union: the ECB being given responsibility for monitoring all euro zone banks and others that sign up; a fund to close down and settle the debts of failed banks; and a fully fledged scheme to protect savers' deposits.

Enria's comments underscore one of the central problems created by this union, namely that it will drive a wedge between those countries inside the scheme and those outside, whose banks may suffer as a result.

Britain, for one, does not use the euro and will stay outside the scheme, but many international banks in London have operations in the euro area that will be affected by the ECB's new supervisory reach.

London is worried that the ECB, emboldened by its new powers, will demand regulation that could undermine the city's position as Europe's de facto financial capital. Similar concerns are shared by countries such as Sweden.

Many believe the European Banking Authority, set up to coordinate the supervision of banks in response to the financial crisis and which is run by regulators from across the European Union, could act as a counterbalance.

The European Commission has already suggested a special voting mechanism among EU regulators as a counterweight to the power of those in the euro zone.

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But the agency's credibility has been battered by stress tests of banks, which gave Ireland's banks a clean bill of health before their problems forced the country to seek an international bailout.

Further tests later failed to highlight the seriousness of problems in Spanish lenders before that country too was offered up to 100 billion euros of assistance to prop up its laggard banks.

Enria, whose agency also interprets EU law as it applies to banks, has been under pressure from countries not to expose the full extent of sovereign-debt problems in banks, had to limit testing.

The close ties between governments and the banks they supervised and on whom they also relied to buy their debt, has dragged both ever deeper into crisis.

A banking union would break this link by making the policing of banks supranational and establishing central schemes paid into collectively to cover the costs of closing failed lenders.

Enria said that allowing the euro zone's rescue fund, the European Stability Mechanism, to directly recapitalize banks was "crucial to cut the link with the sovereign".

Calling for a move to deal with bank liabilities at a "European level", Enria said: "You need to have the banks contributing to a European fund and you need to make sure that this is enough and that banks can fail without putting at risk taxpayers' money."

European financial backstops were needed in the mean time, he said.

For banking union to work, it will require countries to surrender a degree of sovereignty over banking supervision, which has long been a national responsibility.

But even those who stay outside the framework can be affected. Hungary, many of whose banks are owned by banks in the euro zone and who would in future be supervised by the ECB, is worried they will lose control of their lenders.

(Additional reporting by Huw Jones in London, editing by William Hardy)

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