* Officials to finalise plan for uber-watchdog by September
* Supervisor to have wide remit to police banks in euro zone
* Officials consider moving watchdog away from Frankfurt
By John O'Donnell and Marc Jones
BRUSSELS/LONDON, Aug 1 The European Central
Bank's watchdog for banks could get the power to order the
closure of lenders in what would be a radical step to tackle the
crisis, prompting concerns by policymakers that such
responsibility could backfire.
The plan remains subject to intense debate between the ECB,
the European Commission and member states, but officials and
policymakers who spoke to Reuters have outlined a framework of
how an ECB-sponsored uber-watchdog could work.
Speaking on condition of anonymity, they said the latest
plans envisage giving the euro zone's central bank the remit to
police far more than just the currency area's 25 top banks, as
It is also likely to be allowed step in above national
regulators wherever it identifies problems at a smaller lender.
"If you have something for 25 banks, you do not address the
issue," said one EU official.
"None of the problems we had in the past related to the top
25 banks. The scope should be all banks. The smaller the bank,
the more decisions will take place at a local level."
The blueprint, which is due to be finalised by the EU's
executive in the coming weeks and announced in September, is
central to building a banking union, forging a unified front
among euro zone countries in tackling a five-year bank 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 if and when countries would benefit.
The regulating agency, which will be set up under the wing
of the ECB, may also be located away from Frankfurt - a choice
that divides opinion among countries and officials. The ECB
declined to comment.
Moving it away from Germany's financial capital, home to the
ECB, could help win broad backing from countries to hand it to
control banks around the euro zone.
Such a step could also address some of the ECB's own anxiety
about taking on the new supervisory role, which some officials
concerned about the central bank ending up in a position where
it takes decisions with an impact on national budgets.
Some central bankers are worried that should the ECB get too
much responsibility for supervising banks, this may prove
unmanageable and backfire later, hurting its image if it fails
to spot problems and take action.
One solution to this would be to separate the resolution
authority, responsible for winding up troubled banks, from the
supervisor. Some central bankers would like to see any winding
down of banks carried out under the umbrella of the ESM.
Locating the agency away from the central bank would also
allow for what one official described as an "arms length"
relationship between the agency and the ECB.
ECB President Mario Draghi has said he will not allow
"contamination" of the bank's primary role by supervision work.
"Any new tasks in terms of supervision should be strictly
separate from monetary policy tasks," Draghi said recently.
"There should be no contamination between the two areas and we
will certainly find ways to make it sure that this is the case."
His comments reflect discomfort among some of the bank's
policymakers about taking on supervision responsibility,
concerns that one euro zone central bank source summarised.
"What would happen if another bank in Spain went down under
the ECB's watch?"
Officials will also attempt to find agreement on giving the
new bank supervisor, the power to close failing lenders.
This is likely to prove one of the most contentious points
with countries, who would directly deal with the fallout
including having to pay for at least some of the costs of such
"The right to withdraw the banking license, which is the
hour of death for the bank, must be with the supervisor," said
one EU official with knowledge of the plans. "If the ECB becomes
the supervisor, it has to have this (power)."
"Withdrawing the banking license is a key issue. If a bank
is not viable, it should be closed. If you don't do that you are
going to have a lot of zombie banks. There is no clarity about
which are the viable ones that have a future."
That view was echoed elsewhere. "If a banking union is
complete, you also have a bank resolution authority," said a
second EU official. "The aim would be to have a twin authority -
resolution and supervision."
A European Commission spokesman said: "More integrated bank
resolution and deposit guarantee systems are essential parts of
the banking union. This work will be taken forward building on
existing and future Commission proposals."
One central bank official said the ECB's new agency should
be able to give the order to close a struggling bank or demand
An advisory committee to the European Systemic Risk Board, a
group chaired by Draghi that identifies economic threats, called
this week for the creation of a European Resolution Authority to
wind down weak banks.
Some policymakers at the ECB are worried that taking on such
a task could entangle it in messy closures and are pushing for
this role to be limited to ordering the closure of banks,
leaving their actual liquidation to another agency.