BRUSSELS The European Commission's proposal to tighten bank supervision could be wrapped up by the end of 2012, the EU's top regulatory official said on Tuesday, but a debate among finance ministers already exposed differences over parts of a wider banking union.
"Our objective is to have ... implementation of this supervision before the end of 2012," said Michel Barnier, who as the commissioner in charge of regulation prepares the draft law.
Barnier's announcement of the ambitious timetable came after he attended a meeting of finance ministers from the EU's 27 member states, who debated a banking union to forge a common response to the financial crisis.
Making the European Central Bank what Barnier called a "lynchpin" in supervising big lenders is an important element of such a union and also a prerequisite for the euro zone's permanent rescue fund, the European Stability Mechanism (ESM), to directly assist banks rather than through governments.
With little more than seven weeks until the start of September, the month Barnier said he would present his proposal, the Commission appears to be moving exceptionally fast. Setting up the new supervision would likely take more time.
But some officials believe his timetable of a further three months to finalize an agreement with the countries that sign up to the new scheme is unrealistic.
Already on Tuesday, some ministers expressed reservations about another proposal presented by Barnier for a legal framework to close down troubled lenders, another element of a banking union.
Spanish Economy Minister Luis de Guindos said draft rules to force losses on bondholders of failing banks should be handled carefully to avoid aggravating market turmoil.
The proposal made last month by the Commission would grant local regulators power to take control of stricken banks, break them up and impose losses on their bondholders.
But like many other elements of the banking union, the approval of EU countries is needed before the proposal becomes law and ministers will have the chance to change the rules that some fear could compound the problems of weak banks.
De Guindos highlighted Madrid's concerns over "bail-in" rules that would make it possible to force losses on bank bondholders.
"There are some sensitive issues," he told fellow ministers. "The issue of the bailing-in is something we have to discuss in detail."
"We should try to minimize potential collateral effects that this could have at times of uncertainty and turmoil in the markets."
Spain is grappling with a banking crisis after the collapse of its property market and is expected to finalize a package of emergency financial aid from the euro zone later this month.
If agreed by member countries, the law on winding up stricken banks could come into effect as early as 2014, introducing what some officials describe as an insolvency regime for banks in the European Union.
"We need to do our utmost to avoid the use of public funds," said Barnier. "Disorganized bankruptcies have cost so much money for taxpayers."
The regime would also instruct countries to prepare for the collapse of a bank, by collecting the equivalent of 1 percent of bank deposits from an annual levy on banks.
That money would be held in reserve and used in an emergency to prop up a troubled bank with loans or guarantees.
Banks are concerned that the new rules will make it more difficult for them to borrow if traditional investors are threatened with a loss.
(Reporting By John O'Donnell; Editing by Jon Loades-Carter)