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Banking regulator for 28-nation EU by November 2014?

Back in September 2012, the European Commission (EC) proposed a European Union (EU) banking regulator, which has come to be known as the Single Supervisory Mechanism (SSM), to oversee the 28-nation bloc’s banking sector. This week, the establishment of such a body moved a step closer.

Lithuania’s Finance Minister (Lithuania currently holds the EU’s rotating presidency) Rimantas Sadzius announced yesterday that he was “very glad to note the adoption of this very important single supervisory mechanism package.” Michel Barnier, Commissioner responsible for internal market and services,  was even more enthused stating that they had “written regulatory history” and describing the move as  ”a momentous step – the start of a new era for the supervision of Eurozone banks.”  One should however exercise some restraint in rejoicing as the EC proposal has not yet been fully green-lit.

The SSM was due to become effective during Q1 2014, but disagreements over how far-reaching its influence should be and how it might affect relations between member states that use the Euro and those who do not delayed any deal.

The agreement reached in Luxembourg this week stipulates that the SSM is to be run by the European Central Bank (ECB) and provisions have been made to ensure that the 11 non-euro members of the EU are not overpowered by the 17 Eurozone countries, as any action requires a double majority in both camps before it can be enforced.

While this week’s agreement no doubt represents a watershed, it must still be seen as only the foundation of a single supervisory body in Europe as there is still much work to be done. Common rules to deal with failing banks and on a deposit guarantee fund to protect savers must still be agreed upon, something of which EC President José Manuel Barroso is all too aware: “Now it is urgent to put the second leg in place by agreeing the single resolution mechanism and the single rule book for bank resolution tools and deposit guarantees.”

The potential stumbling block appears to be the so-called Single Resolution Mechanism (SRM) for troubled banks. Several EU members, most notably the bloc’s largest economic power Germany, are reluctant to cede power to a single EU-wide SSM and have raised questions over how a bailout fund would be financed and these issues must be resolved before the likes of Barnier and Sadzius can begin to dream of a regulator for the EU banking sector.

Such an agreement needs to be reached before the end of the year so that the legislation can be ratified by the European Parliament before the end of its current term in May 2014. Time is therefore of the essence but the steps taken this week demonstrate that there this is appetite for the Single Supervisory Mechanism and we may just see such a supranational body regulating the European Union’s banks by the Commission’s target date of November 2014.

Want to know more about the European banking landscape? Check out MarketLine’s industry report ‘Europe – Banks’.

For regular updates on news from the financial services sector, follow me on Twitter @NickMarketLine

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