AnalysisThe initiative is key to enabling the ESM fund to recapitalise stricken banks
After 14 hours of talks, it was 4.30am yesterday morning when EU finance ministers finally struck a deal to give the European Central Bank new powers to supervise commercial banks.
The initiative, which will not go live until the spring of 2014, is a crucial precondition for the ESM fund to recapitalise stricken banks directly.
Despite the protracted dispute over the scope, scale and speed of the move to expand the ECB's role, the deal marks a big step forward for the "banking union" initiative.
The next immediate step is for European governments to finesse the new arrangements to the satisfaction of the European Parliament, something they aim to do before the end of the year.
Deadline
Beyond that, EU leaders must still agree terms for the ESM to rescue banks. This is tricky. The leaders are divided over whether the ESM should bear historic or legacy banking debts, which Ireland wants but Germany rejects.
Going into the summit, the European Council president wanted the leaders to fix a deadline in March to settle this and other disputes over the ESM's new role.
Uncertainty also surrounds new moves to harmonise the protection of bank deposits in the EU and to "resolve" collapsing banks without drawing on taxpayer support.
While these are complex, laborious debates, the key point now is that the decision on the ECB's new powers sets the "banking union" in train.
What is more, the decision was made within the ambitious deadline set by EU leaders at their summit on June 29th. Although this was seen as a hurdle too high by many in the diplomatic world, it proved not to be.
The ECB will supervise up to 200 banks directly, with a minimum of two per country and including larger cross-border institutions and banks in receipt of state aid.
This includes banks with assets of €30 billion, or greater than one-fifth of their country's economic output.
The ECB will also have the right to scrutinise any other bank in the euro zone.
"The ECB will have direct oversight of euro zone banks, although in a differentiated way and in close co-operation with national supervisory authorities," said the ministers in a statement.
Voting rights
To avoid any conflict of interest between the ECB's policy role and bank supervision, the central bank will set up a special supervisory board to look after its activities in the banking sector. "Non-euro zone countries participating in the SSM [single supervisory mechanism] would have full and equal voting rights on the supervisory board," said the ministers.
National regulators would, for example, retain responsibility for consumer protection and anti money-laundering activities.
