STRASBOURG, France – The European Central Bank should be given the power to supervise all the banks in the 17 countries that use the euro and also be able to fine institutions, the European Union's executive said Wednesday.
The creation of a single supervisor would be an important step toward a "banking union" — a unified playbook for all of the banks in the eurozone that is vital part of the plan to solve the region's crippling financial debt crisis.
In its proposal to solve the eurozone's financial crisis, the European Commission called for the ECB to take over supervisory roles from the member countries' individual banking regulators.
The Commission also proposes the ECB should have are the ability to issue — and take away — banking licenses, approve large mergers and acquisitions, investigate banks and fine institutions that break the rules.
Banks have played a big role in creating the eurozone's financial crisis. The government debt the banks had bought up during the boom times of the eurozone are now no longer considered safe bets and the banks are struggling to unload them — usually at hefty losses. The banks' government debt problems have been made worse by toxic real estate loans assets following a collapse the region's property markets. In some cases, governments have been forced to step in to prop the lenders up. But rescuing banks is expensive and has added to investors' concerns that European countries are simply spending too much.
Many banks have retrenched into their home countries, lending to fewer and fewer companies and households and ditching investments made in other members of the eurozone — especially in Greece, Italy and Spain. That has undone much of the founding principles of the single — to allow money to flow freely and cheaply across borders.
The proposed banking union is one part of a strategy to restore confidence in the eurozone's financial system. Other measures: creating a European-wide system of depositors' insurance, a single method for winding down bankrupt banks and allowing the European bailout fund to directly help out banks in trouble, instead of lending money only to governments.
The proposal published Wednesday morning still needs to be approved by the European Parliament and the Council, on which the heads of state and government of all 27 countries of the European Union sit.
It could be a tough fight since Germany — one of the most powerful members, especially when it comes to the eurozone — has said it only wants the ECB to supervise those banks which, if they were to go bankrupt, would cause major damage to the eurozone.
German Finance Minister Wolfgang Schaeuble has argued that if the ECB is going to be effective, it should only focus on the biggest banks, as the burden of supervising all 6,000 eurozone banks, many of which only do business in their home countries, would be too great.
The commission's proposal, however, goes much further. It wants all banks, big and small, to be put under the ECB's supervision.
"What the crisis has taught us is that even medium or small banks can create lots of damage," said a European Union official, who would speak only on condition of anonymity to describe how the proposal was put together. "So it would be irresponsible to devise a system that basically says we're going to focus our attention on the large ones and the small ones just, you know, don't think about them"
Currently, the ECB is only in charge of monetary policy for eurozone countries — setting interest rates and printing money.
National central banks, in most countries, have the role of supervisor, ensuring that banks in their countries follow the rules and aren't engaging in risky practices. However, the global financial crisis that begun in 2007 has proved that this system has failed to properly assess risks to the banking system.
The commission's proposal would see the ECB take over most of what the national supervisors do, although it would not be in charge of winding down banks that go bust. That could come later, the EU official said.
The plans could heap even more responsibility on the ECB if any of the 10 countries in the European Union that don't use the euro also want to sign up to the plan.
The commission hopes its proposal will take effect Jan. 1, 2013, and slowly ramp up until it is supervising all banks by a year later. It wants it to start by covering the bigger banks and eventually add all 6,000 banks in the eurozone.