THE European Union agreed yesterday to let the ECB police eurozone banks, taking its first step towards a banking union just as a levy imposed on Cypriot savers showed that the bloc will struggle to respond in a united way to bank problems.
The deal is a necessary first step for any agreement to retrospectively help Ireland and Spain with the cost of bailing out banks.
The European Parliament and member states' representatives sealed an accord reached late last year to give the European Central Bank (ECB) powers to supervise eurozone banks from the middle of next year.
That agreement had initially been applauded as a step towards integration. But the surprise levy on Cypriot bank deposits agreed as part of the country's bailout deal at the weekend has dented confidence that Europe will be united in tackling bank problems rather than leaving countries to struggle alone.
"The deeply distressing problems faced by Cyprus show how insufficient this step is in itself," said Martin Schulz, the German president of the European Parliament, calling for an EU-wide scheme to close failing banks and guarantee deposits.
Under the deal, banks that have assets of $30bn, or more than one-fifth of their country's economic output, will be overseen by the ECB rather than national supervisors.
The ECB will also be allowed to intervene if it sees problems in smaller banks as well, giving it the clout to trigger the closure of struggling banks.
Although designed chiefly for the 17 countries in the eurozone, non-euro countries that sign up for ECB monitoring will be given equal rights of representation in the system.
Countries that wish to stay out, such as Britain, will also be given protection from interference from the ECB through a special voting scheme to be used when supervisors across the entire 27-member European Union meet.
The agreement, which will later be rubber-stamped by all EU countries, will also allow the European Banking Authority to conduct and publish annual stress tests on banks, one EU official said.
"This is a fundamental step towards a real banking union, which must restore confidence in the eurozone's banks," said Michel Barnier, the European commissioner in charge of regulation.
The next pillar of the banking union will be the creation of a central system to close troubled banks and a fund to cover the costs, ensuring that individual countries, such as Cyprus or Ireland, are not left to shoulder these burdens alone.
But the reluctance of Germany and other economically strong countries to underpin such a fund will make it hard to set up.
Paul De Grauwe, an economist with the London School of Economics, said that the levy to be imposed on Cypriot savers illustrated the lack of support for pooling national resources.
"This is almost a fatal blow to banking union," he said. "The one key element of banking union is a system to help each other out and share the cost when there is a banking crisis in one country. There is no willingness to do that."