Common bank supervisory authority. At this week’s summit to define a road map for structural economic reforms of the European Union, EU heads of state did agree on how to make the ECB a supervisory authority for European banks. Goals included ensuring similar bank monitoring quality across Europe and enabling more rapid identification of national banks that are starting to slide into trouble. Starting in 2014, the ECB will monitor only banks that are particularly large (balance sheet >30 billion euros or >20% of their country’s economic output but in any case each country’s three largest banks) and/or internationally active; currently this would cover the ~150 most important banks in Europe and ~30 banks in Germany. In justified cases, the ECB will be able to audit additional bank types, such as banks that have received financial assistance, and after the first indications of financial crisis the ECB should be able to intervene with all banks. The new authority will be mandatory for Eurozone members, with voluntary participation for other members.

Germany had objected that giving the ECB authority over all European banks (~6000) would leave German taxpayers on the hook for banks in other countries. France had wanted to give the ECB authority over all European banks in order, they said, to get the new system up and running more rapidly. As it is, more French banks than German banks will be subjected to the new ECB monitoring (President Hollande said 95% of French banks and 82% of German banks will probably be covered by the new authority). The new system is intended to cut links between national banks and sovereign debt, capping the tendency for some governments to issue too much debt and for their national banks to buy too much of it. They’re still discussing how to avoid conflicts between the ECB’s monitoring and financial policy roles. To separate the two functions within the same institution, it has now been agreed that a board will be created that does not include people involved with the financial policy side. When the ECB’s governing council, the highest financial policy board at the ECB, disagrees with the ECB’s bank monitoring decisions, an “arbitration mechanism” will be applied. Experts say much remains to be clarified.

The European Stability Mechanism (ESM) should be up and running in 2013. It will be able to send capital directly to troubled banks, with the prerequisite that it first unanimously asks the ECB to take over running them, and the ECB agrees to do so.

Update on 12 Sep 2013: The E.U. parliament approved the creation of a central Bankenaufsicht, being variously translated as a central bank oversight, a banking union, a single bank supervisor or single supervisory mechanism, that is intended to increase the world’s economic stability by being separate from national governments and national bank associations. It is to be at the European Central Bank but to be kept strictly separate there from other E.C.B. business, somehow, and now planned to be up and running by Fall 2014.

Update on 15 Oct 2013: The E.U., in the form of the Member States’ finance ministers, agreed on the basic structure of the Bankenaufsicht, to be indeed located at the European Central Bank. It will have oversight over ~130 large European banks. Startup is scheduled for ~November 2014. Tagesschau.de added that the Bankenaufsicht is the first of three planned “pillars” of the E.U.’s banking union [Bankenunion]. The other two pillars, “a mechanism for winding down rotten banks [marode Banken] and a uniform deposit insurance [Einlagenversicherung],” have still to be defined.

A stress test is scheduled next month for Europe’s 130 largest banks, because people remain concerned that some large banks might have managed to keep some risk mismanagement hidden in their books, even at this late date. Only after banks have passed the upcoming stress test, however strict it turns out to be, will they be allowed into the protection or at least under the umbrella of the new Bankenaufsicht.

Tagesschau.de’s Rolf-Dieter Krause commented about the upcoming E.U. stress test, “After rather doubtful exercises of this type in the past, this time they say they are *really* going to test the banks.”

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