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Wednesday, Dec 12, 2012 3:00 PM UTC

Europe seeks to make progress on banking union

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Topics: From the Wires,

BRUSSELS (AP) — European finance ministers moved closer Wednesday to creating a single supervisor for banks for the 17 countries that use the euro after France and Germany patched up their differences over the issue.

For months, it seemed like an agreement this year was unlikely, but Irish Finance Minister Michael Noonan said a common position between France and Germany represented a big step toward a solution.

“On the basis of that, it looks as if there is at least the basis of an agreement there,” Noonan said on the sidelines of a meeting of the European Union’s 27 finance ministers. “But you know the way it works — you’re never certain until the debate starts.”

The continent’s two biggest economies disagreed last week on the powers and setup of such a new body, which prompted Wednesday’s special meeting on the eve of a summit of EU leaders. The meeting could still see a fight between the countries that use the euro and those that don’t — the latter of which are worried about their diminishing power as the eurozone countries grow ever closer in light of their debt crisis.

A banking supervisor is the first step in a broader plan to have a banking union, which could improve the eurozone’s ability to respond to any new future financial crisis.

One of the seeds of the current crisis was bad real estate loans, which dragged down the banking sector in large parts of Europe and threatened to derail the governments that were then forced to bail them out. However, national supervisors have often been reluctant to play tough with their banks.

A common European supervisor, proponents say, would bypass national political considerations and do what is needed to keep the continent’s financial sector healthy. Shoring up the banks has been seen as an essential part of avoiding a recurrence of Europe’s financial crisis.

A two-day summit of European heads of state and government starting Thursday will seek to reach agreement on the supervisor. The leaders have promised to reach a deal by the end of the year.

“I am confident that we will find a solution for banking supervision in time for Christmas,” said German Finance Minister Wolfgang Schaeuble in an apparent reverse from his recent suggestions that a deal this year was unlikely.

While France had wanted to have every bank in the 17 country eurozone supervised by the European Central Bank, Germany called for a more restrictive system applying to only the biggest banks. The two also disagreed over the responsibility of the ECB in deciding supervision issues and keeping those issues strictly separate from setting monetary policy.

But in recent days, French officials have said they would accept giving the supervisor authority over banks that are beyond a certain size.

The ten European Union countries that don’t use the euro will be allowed to choose to put their banks under the authority of the new supervisor; some have expressed interest in that since it would be a signal to investors that their lenders are solid.

But countries, like Sweden and Britain, that don’t want to submit to the new supervisor will be fiercely defending their voices in the European Banking Authority, which sets the rules for banks across the 27 nation union, regardless of currency. Those countries fear that a united eurozone machine could outvote them in the EBA.

The single bank supervisor must be up and running before other measures can be introduced: European-wide depositors’ insurance; a single method for winding down bankrupt banks; and allowing the European bailout fund to directly help banks in trouble instead of lending money only to governments.

Finance ministers from the eurozone nations will also assess early Thursday the latest Greek initiative to lighten its debt load.

On Wednesday, the Greek debt management agency said Greece will buy back €31.9 billion ($41.5 billion) of its bonds from private investors at a third of their face value, lightening its crushing debt load and meeting a key condition to receive vital rescue loans.

But the deal will be costlier than originally budgeted, and must be approved by bailout creditors who are lending Greece the funds necessary to stay afloat.

____

Don Melvin in Brussels and Sylvie Corbet in Paris contributed to this article.

More By Sarah Dilorenzo And Raf Casert.

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