THE European Commission unveiled sweeping plans for the European Central Bank to supervise all eurozone banks yesterday, though Germany immediately raised objections that the proposals risked overstretching the ECB.
The proposals would apply to banks such as Bank of Ireland, AIB and Permanent TSB but not to banks that are being wound down, like Anglo Irish Bank and Irish Nationwide.
European Commission president Jose Manuel Barroso set out the proposals in a speech to the European Parliament, telling its members that giving the ECB responsibility for monitoring banks would be the first step towards creating a banking union for Europe.
The reforms, which need to be approved by the European Union's 27 member states, aim to break the link between struggling banks and heavily indebted governments, an interdependence that has exacerbated the debt crisis over the past three years.
By empowering the ECB to police all banks in the eurozone, the proposal hopes to break the vicious cycle and then lay the ground for deeper fiscal co-operation across the EU as the economic and monetary underpinnings of the union are strengthened.
"We need to move to common supervisory decisions, namely within the euro area," Mr Barroso said in his speech, saying the ECB should take charge of all eurozone banks -- by most estimates around 6,000 institutions.
Germany, which is keen to retain primary oversight for its regional savings and co-operative banks, had already questioned whether the ECB should spread itself so thinly and repeated its reservations immediately after Mr Barroso's speech. Both Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble said the ECB would be more effective in its oversight if it had responsibility only for the largest, systemically important banks in the eurozone, which number about 25-30.
"The quality and efficiency of the new supervisor must be the focus. Purely on practical terms it seems impossible for the ECB to monitor 6,000 banks appropriately," Mr Schaeuble said in a statement.
Establishing a common framework for dealing with problem banks would mark a departure from the previously haphazard approach taken by the eurozone's 17 members that has frustrated investors and helped drive up borrowing costs for weaker states.
For the plan to work, however, it will require countries to surrender a degree of sovereignty over banking supervision, which has long been a national responsibility. Both Germany and Britain have chafed at the surrender of oversight, for different reasons. Some eastern European states are also concerned.
Given that day-to-day supervision of banks would remain the task of national regulators, some officials suspect that Berlin's real concern is that a banking union would see it paying the costs of propping up lenders in weak countries.
A banking union foresees three steps: the ECB getting the power to monitor all eurozone 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 eurozone.
The ECB welcomed yesterday's proposal, saying it laid the foundation of a financial-market union to ensure financial stability in the eurozone. (Reuters)