July 2, 2012 / 1:53 PM / 5 years ago

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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