EU lawmakers set to back central bank oversight

European lawmakers are expected to back legislation establishing a new, centralized oversight for Europe’s largest banks Thursday, marking what is considered a key step toward stabilizing the bloc’s financial system.

The centralized bank supervision authority, which will be anchored by the European Central bank, is due to be up and running late next year following a thorough stress-test of the banks’ balance sheets.

The so-called single supervisory mechanism is the first of three pillars of the bloc’s planned banking union, which is a cornerstone of the policies to turn the tide on the 17-nation eurozone’s three-year-old debt crisis.

Its goal is to make supervision and rescue of banks the job of European institutions rather than leaving weaker member states to fend for themselves. Failing banks in the past have dragged down government finances and forced European Union countries such as Ireland or Cyprus into seeking bailouts.

However, the establishment of the banking union’s remaining pillars – setting up a joint deposit guarantee and an authority to restructure or wind down banks complete with a common financial backstop – is still a long way from being agreed upon.

Many analysts warn the reluctance of creditor countries such as Germany to agree on a joint backstop could jeopardize the banking union project as a whole.

“There is a strong probability that the institutional arrangements will fall well short of the consistent, effective framework required to attain the objectives of banking union,” Deutsche Bank analysts said in a research note last week.

The European banking supervisor authority will directly oversee some 130 banks representing about 80 percent of all bank assets in the 17-country eurozone. Members of the wider 28-country EU that do not use the euro currency, like Britain or Poland, can opt to join later.

The vote on the legislation was initially scheduled for Tuesday, but lawmakers called it off as they urged the ECB to agree to greater disclosure of the new oversight authority’s decisions. While the ECB resisted demands to release minutes of the authority’s meetings, it accepted to disclose comprehensive summaries to lawmakers to avoid delaying the crucial legislation by at least another month.

The ECB says it refused to disclose detailed financial information on the situation of specific banks because of the sensitivity of those figures, in particular in times of crisis when the regulator would be most likely to intervene.

Lawmakers appeared content with the solution, saying it guarantees necessary democratic oversight without jeopardizing financial stability.

“It’s a supervision of the ECB, without in any way undermining the ECB’s independence» or endangering a level of banking secrecy required «to protect the markets from unnecessary shocks,” European Parliament President Martin Schulz said Tuesday.

Once the legislation enters into force, the ECB plans to unveil its roadmap for the next steps by mid-October.

The Frankfurt-based central bank will then announce details of how it will assess the balance sheets of the banks the new body will be overseeing.

Analysts say to restore credibility and trust in Europe’s banks, the review must be tougher than previous stress tests, and Europe must make it clear beforehand who would provide the billions of euros necessary to recapitalize institutes deemed too weak. [AP]

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