ECB to gain 'unprecedented powers' in banking union

Questions have been raised about the European Central Bank's suitability to take on the "unprecedented" powers it will gain as a single supervisor for all 6,000 eurozone banks under long-awaited proposals unveiled by the European Commission today.

The controversial plans, if agreed, would hand the ECB the authority to grant and withdraw bank licences, and to carry out "early intervention measures" when banks fail to meet capital requirements, the commission said. The European Union executive said it wanted the system to take effect in a staged introduction starting in January 2013, and fully implemented by July 2014. It urged the European Parliament and member states to reach agreement by the end of this year.

According to the commission, national supervisors would continue their role in protecting consumers. Meanwhile the existing European Banking Authority, which works across all EU countries, would be tasked with preserving the integrity of the single market and ensuring consistency in supervision in all member states. Non-eurozone countries would be allowed to take part in the banking union if they wished.

José Manuel Barroso, president of the commission, said: "This new system, with the ECB at the core and involving national supervisors, will restore confidence in the supervision of all banks in the euro area."

And internal market commissioner Michel Barnier added: Banking supervision needs to become more effective in all European countries to make sure that single market rules are applied in a consistent manner. It will be the role of the ECB to make sure that banks in the euro area stick to sound financial practices. Our ultimate aim is to stop using taxpayers' money to bail out banks."

But Sony Kapoor, director of the think-tank Re-Define, warned that while there was "merit in the idea of weakening the cosy link between some national supervisors and the banks they supervise", giving the powers to the ECB might not be the best move. "This will lead to an unprecedented concentration of powers at the ECB, which is worrying especially because it is already one of the most powerful and least accountable central banks."

He also voiced concerns about how quickly the measures could be put in place. "The tight-phased timeline announced may be unrealistic both because of the contentious nature of the regulation, which would probably take time to get agreement on, but equally important because the ECB will be required to develop extensive supervisory capacity from what is essentially a standing start."

Guy Verhofstadt MEP, leader of the Alliance of Liberals and Democrats, said the proposals raised "several doubts". "It opens a possible conflict of interest between the ECB's role as guardian of price stability and its supervisory tasks," he said.

And Elisa Ferreira MEP, spokeswoman on economic and monetary affairs for the Socialists and Democrats, cautioned that the transfer of powers to the ECB would require "proper parliamentary control at the EU level to ensure accountability". However, her group leader Hannes Swoboda welcomed the proposals overall, describing a banking union as "crucial in the long-term in stabilising the eurozone".

And there was support for the general direction of the proposals across the political spectrum. Marianne Thyssen MEP, from the centre-right European People's Party, said "uniform and integrated banking supervision" was a "vital part of the package of measures needed to fix the construction faults the euro is struggling with".

Rebecca Harms, co-president of the Greens/European Free Alliance, described it an "overdue step", adding: "Light-touch supervision and oversight has enabled financial institutions to engage in risky and irresponsible activities, the wider, devastating economic consequences of which we have been struggling to deal with since 2008. Proper supervision of all European banks, with a view to preventing a recurrence of this and to strengthening the real economy, must be a central element of the new European banking union."

In addition the proposals should help restore confidence in the financial system and economy, said Simon Lewis, chief executive of the Association for Financial Markets in Europe. "Creating a strong banking union, built around a credible and effective supervisor, should break the link between the solvency of Europe's banks and its sovereigns, which has been a significant cause of instability in recent years."