Frictions holding up new European bank supervisor

(BRUSSELS) - The creation of a new system to supervise banks across the eurozone, a key condition for future use of eurozone rescue funds, has been held up by multiple frictions:

ITS SCOPE

Legislative proposals drawn up by the European Commission place the European Central Bank at the system's apex.

Some 6,000 banks across the eurozone -- and with interests beyond it -- are to be supervised, starting with those in countries already in receipt of bailout aid before rolling out to the rest.

Germany argued that smaller banks, like regional German savings banks, should not be included. When supervision does extend to these, the problem has arisen as to who is charged with their monitoring -- the ECB or national regulators.

Agreeing on which banks fall into which part of the supervisory net has proved difficult.

NON-EURO COUNTRIES WANTING IN

A number of countries want to be a part of the system, but are not members of the eurozone. In the case of Poland or Sweden, that means they have no voice at the ECB.

Voting rights in the system have therefore posed problems.

Various schemes allowing for non-euro countries to vote on the supervisory panel have failed to make a breakthrough.

Part of the reason is because the the eurozone, which has a population of 330 million people, largely dominates the overall European Union, which has a total population of around 500 million.

Another reason is French suspicion of anything that might offer Britain, which is not a eurozone member, a de facto veto.

On a more general level, many finance ministers -- not least Germany's Wolfgang Schaeuble -- are determined to ensure a strict separation of powers between the ECB's supervisory role and its core function of managing monetary policy across the 17 states that share the euro currency.

HOW THE ECB INTERLINKS WITH THE EBA

The creation last year of the London-based European Banking Authority was a first EU attempt at learning the lessons of the 2008 global financial crisis.

But as bad debt boomeranged back and forth, undermining the balance sheets of both governments and banks, a new system designed to be more than just a coordination of national regulators was deemed necessary.

The EBA is supposed to retain control over bank regulation across the entire 27-member EU.

But if the ECB, as the eurozone supervisor, casts its vote in the name of all 17 eurozone member states, the 10 other EU members will struggle to be heard.

One diplomat said ahead of the collapse of the talks: "This shows we were right to be paranoid."

THE TIMETABLE

In October, EU leaders said they wanted a political deal on the system's framework by year-end and a gradual phasing-in over the course of 2013.

Mediterranean countries under pressure on bond markets over the past year wanted quicker implementation, but Germany held out for less haste.

On Tuesday, EU Markets Commissioner Michel Barnier said the ECB should be free to determine when it would be ready to fulfill its new functions.