* EU leaders agree legal framework to be completed this year
* ECB-led supervisor to oversee euro zone banks
* Day-to-day supervision of most to be delegated
* Little talk of Spain, Greece aid at summit
* Hollande: “The worst is behind us”
By Jan Strupczewski and Luke Baker
BRUSSELS, Oct 19 (Reuters) – European Union leaders agreed
on Friday a single supervisor will take responsibility for
overseeing euro zone banks from next year.
Details on the precise number of banks to be monitored and
the powers the supervisor — the European Central Bank — will
have, however, were left for later.
The decision opens the way for the euro zone’s rescue fund
to inject capital directly into ailing banks during the course
of 2013, but whether that will allow Spain to transfer some of
its banking liabilities off the government’s books will also not
be determined until later in the year.
“There was an agreement, a good agreement, on timing and
about the banks as whole,” French President Francois Hollande
told reporters as he arrived for the second day of the summit
following 10 hours of talks on Thursday that carried on into the
early hours of Friday.
“There was a willingness to progressively put in place the
(oversight) mechanism.”
European Council President Herman Van Rompuy said the 27
leaders agreed to adopt a legal framework by the end of this
year giving the European Central Bank overall responsibility for
banking supervision, with national regulators consulted.
“Once this is agreed, the single supervisory mechanism could
probably be effectively operational in the course of 2013,” he
told a 4 a.m. news conference.
French and EU officials said all 6,000 banks in the single
currency area would gradually come under ECB supervision by
2014, starting with banks receiving state aid, then large
cross-border institutions, even though a statement from EU
leaders did not specify a number or the specifics of a timeline.
One of the thorniest issues — what representation non-euro
zone banks that decide to join the scheme will have at the ECB
— was left to one side and will have to be resolved by the end
of the year, along with a number of other legal obstacles.
Even though leaders committed to have the scheme fully in
place by the end of 2013, Van Rompuy joked with leaders that he
was unlikely to be in office once full supervision was in place,
Polish Prime Minister Donald Tusk told reporters. Van Rompuy is
due to end his term at the end of November 2014.
Creating an effective banking union, for which this deal was
a first step, is regarded by the International Monetary Fund and
market economists as a key component in overcoming the euro
zone’s three-year-old debt crisis.
Hollande said the leaders did not discuss possible financial
assistance for Spain, another critical issue in resolving the
three-year crisis, but he laid out a series of steps that could
help turn a corner.
“Tonight, I have the confirmation that the worst is behind
us,” he said at a news conference in the early hours. “We are on
track to solve the problems that for too long have been
paralysing the euro zone and made it vulnerable.”
German Chancellor Angela Merkel said it would take more than
a couple of months before the supervisor was fully effective and
direct bank recapitalisation could be considered.
Germany has been reluctant to see its politically sensitive
savings and cooperative banks come under outside supervision. It
rejects any joint deposit guarantee under which richer countries
might have to underwrite banks in poorer states.
The deal came after the leaders of France and Germany,
Europe’s central powers, held a private meeting after clashing
in public over greater EU control of national budgets.
The point when the ECB will effectively become the bloc’s
banking supervisor is important because it would open the way
for the euro zone’s bailout fund to inject capital directly into
troubled banks, without adding to their host governments’ debts.
A French government source said the European Stability
Mechanism (ESM) could start recapitalising troubled banks as
early as the first quarter of 2013, but a German source said it
was “very unlikely” to happen so soon.
Merkel earlier demanded stronger authority for the executive
European Commission to veto national budgets that breach EU
rules. She said a December EU summit would take decisions on
these issues of closer euro zone economic governance.
For once, the summit was not under intense pressure from
financial markets, which have calmed since the ECB pledged last
month to intervene decisively if needed to buy bonds of troubled
euro zone states to preserve the euro.
“FISCAL CAPACITY”
The EU leaders issued a statement welcoming Greece’s
progress towards an agreement with its lenders and saying good
progress had been made in putting the bailout back on track.
Merkel also advocated the creation of a European fund to
invest in specific projects in member states which she said
could be fuelled by a financial transaction tax which 11 euro
zone countries have said they will adopt.
Her call echoed a proposal for the 17-member euro zone to
have its own budget — known in EU jargon as a “fiscal capacity”
— on top of the 27-nation union’s common budget, which mostly
funds agriculture and aid to poorer regions.
Several states, including the Netherlands, Finland and
Austria, were uneasy at the idea but none rejected it outright.
Since the ECB said last month it was ready to buy the bonds
of struggling euro zone states in unlimited amounts, state
borrowing costs have fallen sharply, easing the immediate
pressure for Spain to seek a bailout.
Spain’s 10-year bond yields sank to their lowest since
February at an auction on Thursday, helped by Moody’s decision
this week to leave its credit rating at investment grade.
But rather than signalling that Madrid does not need help,
Moody’s verdict was predicated on Spain soon applying for a euro
zone assistance programme to trigger ECB intervention.
Italy raised a bumper 18 billion euros from a four-year
inflation-linked retail bond — the most ever raised in a single
debt offering in European markets — reducing its need to issue
debt before the end of this year.
On the banking union, much work remains to be done and the
deeper the discussion union goes, the more complex and
problematic it will get.
Countries outside the euro zone — particularly Britain,
which has Europe’s biggest banking sector — are concerned their
banks could be disadvantaged if a balance is not maintained
between the ECB and its oversight of euro zone banks and the
powers of other authorities to oversee non-euro zone banks.
And if non-euro zone countries such as Poland join the
banking union, as policymakers are hoping, it is unclear what
representation they would have within the ECB, since the central
bank is currently answerable only to euro zone member states.
