* Banking union a major step towards deeper integration
* ECB would get powers to police banks under proposal
* Germany and Britain apprehensive about plan
By Claire Davenport
STRASBOURG, France, Sept 12 Europe will move a
step closer to a "banking union" on Wednesday with plans for the
European Central Bank to oversee banks as part of efforts to end
years of financial and economic turmoil in the region.
European Commission President Jose Manuel Barroso will
outline the proposal in his annual "state of the union" address,
which will also set out a path towards deeper economic
integration across the euro zone and the wider EU.
The proposed banking reforms, which Barroso will present to
the European Parliament, need to be approved by EU member
states. They aim to break the link between heavily indebted
countries and their struggling banks, tackling a core element of
the debt crisis that has afflicted Europe since early 2010.
Spain, which is trying to cut its budget deficit in the
middle of a recession, has already had to request up to 100
billion euros in European aid to rescue it most troubled banks.
For the plan to work, it will require countries to surrender
a degree of sovereignty over supervising their banks. This has
long been a national responsibility and the proposal has already
led to tensions with Germany and Britain.
A banking union foresees three steps: the ECB gets the power
to monitor all euro zone banks and others in the wider EU that
agree to the oversight; the establishment of a fund to close
troubled banks; and a fully fledged scheme to protect citizens'
deposits across the euro zone.
Establishing a common framework for dealing with problem
banks would mark a departure from the previously haphazard
approach taken by the euro zone's 17 members that has frustrated
investors and helped drive up borrowing costs for weaker states.
"The challenge is gigantic," said Nicolas Veron, an expert
in EU financial policy with think-tank Bruegel. "It's not just
banking union. Banking reform is part of a broader agenda of
integration that has been made more pressing by the crisis."
Handing powers of supervision to the ECB also unlocks the
possibility of direct aid to banks from the euro zone's
permanent rescue scheme, the European Stability Mechanism (ESM),
although it is not clear when Spain and others would benefit.
Under the terms of the proposal, the ECB would be put at the
head of the current fragmented system of national regulators
with the power to police, penalise and even close banks across
the euro zone.
The ECB would also gain powers to monitor banks' liquidity
closely and require them to keep more capital to protect
themselves against future losses.
Reaching agreement on the terms of the union could be
complicated, delaying the introduction of the new regime beyond
the target set by euro zone leaders of the beginning of next
Germany, the euro zone's economic heavyweight, is opposed to
allowing the ECB supervise all euro zone lenders.
Berlin says the central bank will be overstretched if it has
to monitor all 6,000 euro zone banks. Commission officials argue
that even small banks can cause a wider crisis, as happened at
Britain's Northern Rock.
Outside the euro zone, Britain is also concerned. Although
it will not join the scheme, many international banks in London
have operations in the euro zone which will be affected by the
ECB's new supervisory reach.
London is also worried that the ECB, emboldened by its new
powers, will demand regulation that could undermine the city's
position as the European financial capital. Similar concerns are
shared by countries such as Sweden.
A draft document lays down a phasing in of this supervision
over one year and says the ECB should be able to police all
banks. The ECB should begin monitoring half of the euro zone
banking sector from the middle of next year.
International banks are also apprehensive. The Association
for Financial Markets in Europe, which represents banks
including Deutsche Bank and HSBC, warned
against "driving a wedge" between those countries inside the
banking union and those that stay out.
"If there were to be a hint of restrictions on conducting
euro transactions in London, for example, that would be a
concern," Andrew Gowers, a spokesman for AFME said. "Banks do
not want to be told where they can or cannot conduct business."