Eurozone bank supervision to start next year, EU leaders say

European Union leaders have agreed to work towards completing the legal framework for a single eurozone supervisor, which will have the power to intervene in any bank in the single currency area, by the end of this year – with the mechanism due to come in to force some time later in 2013.

Following a meeting of EU leaders in Brussels that ran into the early hours of this morning, European Council President Herman Van Rompuy said the single supervisory mechanism, with the European Central Bank at its heart, "could probably be effectively operational in the course of 2013".

He said it marked a "first essential step toward a complete integrated framework for the financial sector", and added that direct recapitalisation of ailing banks by the new eurozone bail-out fund, the European Stability Mechanism, would be possible "once an effective single supervisory mechanism has been established".

Van Rompuy said the new system, which will be overseen by the ECB, would be open for non-eurozone countries to join should they wish. German Chancellor Angela Merkel told reporters: "Our goal is banking supervision that's worthy of the name, because we want to create something that's better than what we currently have."

"Some said we want it quick, Germans want quality," said French President Francois Hollande, referring to a widely reported dispute between the two nations over the timetable for introducing the supervisory authority. "The compromise is both and we have a good deal tonight."

European Commission President José Manuel Barroso said: "We need to definitively break the negative link between bank debt and sovereign debt". He said delivering the supervisory mechanism would enable EU leaders to "honour" the deal made in June to allow the direct recapitalisation of banks from the ESM.

An effective banking union has become a central part of the eurozone's plan for resolving the economic crisis. All 6,000 euro area banks are set to be covered by the supervisor eventually, starting with those receiving state aid, then the biggest cross-border institutions. The ECB is expected to work closely with national authorities.

While Hollande said that possible financial aid for Spain was not discussed at the meeting, on Greece euro area leaders published a statement welcoming "the determination of the Greek government to deliver on its commitments" and commending the "remarkable efforts by the Greek people".

"We expect Greece to continue budgetary and structural policy reforms and we encourage its efforts to ensure swift implementation of the programme," the statement said. "This is necessary in order to bring about a more competitive private sector, private investment and an effective public sector."

Reacting to the deal on the bank supervisor, the leader of the Socialists and Democrats in the European Parliament, Hannes Swoboda, criticised Merkel for slowing down the timetable for bank recapitalisations. "Chancellor Merkel – together with her right-wing European People's Party colleagues – is becoming the European champion of high interest rates by blocking effective action to lower them.

"She should assume her European responsibility, even though it is not her direct problem as she is from a country with low interest rates. She should consider the disastrous impact of her actions on those countries that are suffering because of high interest rates."

Guy Verhofstadt, leader of the Alliance of Liberals and Democrats, said: "The parliament has been pleading for three years for a single supervisor while the council has preferred a simple coordination system. Therefore I can only welcome that by 2014, all 6,400 European banks will finally be placed under the supervision of a single control mechanism, which is the only way to apply the same rules everywhere."