TEXT-Fitch: banking union could support stability
July 2 - The plan to give the European Central Bank a role in supervising eurozone banks could help reinforce financial stability in the sector, Fitch Ratings says. It could ensure a consistent application of the rule book and a co-ordinated regulatory response in times of financial crisis. But a move towards a single supervisor would face numerous challenges and would still have to allow enough flexibility to take account of the different banking practices in existence across Europe. While short on detail, last week's Euro Area Summit statement called for swift progress on a single supervisory mechanism "involving the ECB." Expanding the ECB's role to include supervision and giving it the decision on when to activate recovery or resolution plans could help reduce the potential for political influence over a bank's day-to-day activities or over remedial action when things go wrong. In its role as lender of last resort, the ECB can only provide liquidity to solvent banks, so giving it the role of supervising solvency could also reduce uncertainty about when it can step in to provide liquidity. Many important details of the planned reforms are still missing. Among the most important are how the ECB in its expanded role would co-exist with the European Banking Authority and what changes will be made to European deposit protection schemes. Handing supervisory duties to the ECB would be in line with the trend of giving more power to central banks that is also under way in the UK and Germany. However, expanding the central bank's role swiftly will also create many operational risks because it has not previously been a supervisory body. EU leaders said in a summit statement last week that a single supervisory mechanism for the eurozone would be a condition for allowing the European Stability Mechanism to recapitalise banks directly. We said on Friday that the results of the summit exceeded our expectations and that the creation of a single pan-eurozone bank supervisor with the power to intervene and, if necessary, directly capitalise banks could greatly improve the functioning of Economic and Monetary Union. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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