* Britain drops opposition to ECB supervision in euro zone
* Germany throws cold water on direct aid for banks
* Time running out to agree scheme ahead of ECB tests
By Robin Emmott and John O'Donnell
LUXEMBOURG, Oct 15 EU finance ministers agreed
on Tuesday to give the European Central Bank sweeping
supervisory powers in the euro zone but Germany dug in its heels
on how to deal with failing banks, the second stage in building
a banking union.
The European Union ministers gave their final approval for
the ECB's regulatory role nearly 1-1/2 years after the idea was
first floated, with Britain dropping opposition to a plan it
feared might threaten its control of London's financial centre.
"We have written regulatory history," said Michel Barnier,
the European commissioner who drafted the plan for ECB
supervision. "This is a momentous step: the start of a new era
for the supervision of euro zone banks."
Five years after the financial crisis erupted, many European
banks remain in trouble, holding back the euro zone economy as
it gradually recovers from recession.
The EU is therefore trying to agree the next big step in its
integration by creating a banking framework chiefly for the euro
zone, which would both police the banks and find joint solutions
to their problems.
Ministers won Britain's support for ECB supervision of euro
zone banks from the end of next year after offering fresh
reassurances on its power to regulate the City of London,
Europe's biggest financial centre.
Tuesday's decision endorsed an earlier European Parliament
vote to give the ECB powers supervisory powers over the euro
zone's 6,000 banks. However, such a role would lose much of its
influence without a body to deal with troubled banks.
Germany, Europe's biggest economy, put the brakes on
discussions about how to pay for rescuing or winding up any bank
that gets into trouble.
Finance Minister Wolfgang Schaeuble all but dashed hopes
that the euro zone's rescue fund, the European Stability
Mechanism, would help banks directly without making their home
governments responsible for repaying the aid. Such a step was
"not probable for the time being", he said.
Between 2008 and 2011, the European Union spent the
equivalent of a third of its economic output on saving its
banks, but relied on taxpayers' cash. In the case of Ireland,
reckless bank lending almost bankrupted the country.
The issue of how to pay for bank clean-ups is pressing as
Ireland and Spain prepare to end their reliance on international
aid that shored up their banks during the crisis, concluding
programmes that neither Dublin nor Madrid plan to renew.
Schaeuble spelt out a chief obstacle to directing euro zone
aid for banks, drawing comparisons with Ireland's history of
rejecting European initiatives in referendums. "In Germany, we
need a change of German legislation, which is maybe as difficult
as a referendum in Ireland," he said.
EU leaders, who meet next week in Brussels, have also tasked
their finance ministers with reaching a deal by the end of the
year on a euro zone agency to close or salvage failed banks, the
second stage of banking union.
With just 10 working weeks until the end of the year and
their self-imposed deadline, talks are running into trouble
because Germany fears such a scheme will leave it liable to pick
up the bill.
France, Spain and Italy, on the other hand, want an
immediate commitment by all 17 countries in the euro zone to
stand by weak banks regardless of where they are.
The division was exposed by French Finance Minister Pierre
Moscovici who accused Berlin in a book of holding up progress to
protect its own "strange" financial system of regional banks
that are "deeply intertwined ... with local political circles".
Banking union, which economists consider as important as
creating the euro more than a decade ago, aims to help countries
to deal with problems at banks before they get out of control.
EU leaders are eager to trumpet Ireland and Spain as success
stories after the four years of economic turmoil that started in
Greece when Athens revealed its massive overspending and plunged
the currency bloc into a crisis that threatened its survival.
While an ECB promise to buy government bonds calmed the
panic about the euro's future, many banks are still sitting on a
mountain of loans that may go unpaid.
The International Monetary Fund estimates Spanish and
Italian banks alone face 230 billion euros ($310 billion) of
losses on credit to companies in the next two years.
Before taking on its supervisory role, the ECB will conduct
a series of health checks on the euro zone's 130 biggest banks
next year, seen as the last chance for the bloc to come clean on
losses that have festered throughout the financial crisis.
"This is fundamental and the tests have to be serious, with
strict, rigorous scenarios," Spanish Economy Minister Luis de
Guindos told reporters.