Barroso calls for full EU bank supervision

(STRASBOURG) - European Commission President Jose Manuel Barroso called on Wednesday for a full EU banking and budget union, key steps in anchoring the bloc's future as it fights the eurozone debt crisis.

"Securing the stability of the euro is the most urgent challenge," Barroso told the European Parliament, and setting up a single bank sector regulator in the shape of the European Central Bank is an essential response.

He told lawmakers that simple coordination between member states was no longer adequate and coordinated supervision was an "absolute priority today because it is the basis for better managing banking crises".

EU financial services commissioner Michel Barnier is due to present details of the plans later on Wednesday, with the ECB slated to take on many of the responsibilities now jealously guarded by some major states.

Draft proposals have suggested the ECB will have sweeping new powers, including the key authority to issue and withdraw banking licences, while the ambition is that all banks come under its purview at some point.

Britain, anxious to protect its giant City of London financial centre, is notably cool on the plan while Germany, Europe's paymaster, wants the ECB to focus on the 'too-big-to-fail' banks whose failure could wreck the system.

In response to Barroso's remarks, German Chancellor Angela Merkel said "it's not about supervising every bank and in any case the ECB can't do that. Rather, it's about the quality of the supervision, not just about the quantity."

There should be no rush either, she said, warning that European-wide banking supervision "should not be put in place as quickly as possible and then not work."

EU leaders agreed the new banking supervisor in June as part of a deal to allow the bloc's rescue funds to directly lend funds to stricken banks instead of passing aid through countries and so adding to their debt problems.

It is a first step towards a banking union and sits alongside moves towards the deeper economic and political integration needed to tame the debt crisis which has brought the eurozone economy to a standstill.

The proposal is controversial, reducing the role of the London-based European Banking Authority which was set up in the wake of the 2008 global financial crisis.

Barroso said in an accompanying statement that the 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.

"We should make it a top priority to get the European supervisor in place by the start of next year. This will also pave the way for any decisions to use European (debt rescue) backstops to recapitalise banks."

The aim, he said, was "to break the vicious link" seen when over-extended banks have called for massive capital support to stay afloat, putting such a strain on their government's finances that they in turn need bailouts.

"In the future, bankers' losses should no longer become the people's debt, putting into doubt the financial stability of whole countries."

Greece, twice, and Ireland and Portugal have all had to be rescued by the EU with the help of the International Monetary Fund when they could no longer raise funds on the financial markets.

Spain, the eurozone's fourth-biggest economy, has been pushed to the brink but recent moves by the ECB to cut its borrowing costs and the putting in place of EU debt rescue measures appears to have held the line.

Barroso was speaking as Germany's top court, in a landmark ruling watched around the world, rejected a raft of legal challenges against German ratification of the European Stability Mechanism (ESM) and the fiscal pact.

With the ESM cleared and the ECB ready to intervene on the markets, the EU's crisis fighting machinery finally begins to take shape, as reflected in the current sustained fall in borrowing costs for Spain, Italy and other weaker eurozone member states.

Spanish 10-year benchmark government bonds were returning around 5.60 percent Wednesday, compared with record highs above 7.60 percent in July.

New package for banking supervision 
in the Eurozone - guide