Union Disunion ECB to Begin Inspection of Euro-Zone Banks

The European Central Bank is set to begin inspecting the balance sheets of large EU financial institutions, even as disagreement between Brussels and Berlin threatens the bloc's banking union plans.

ECB headquarters in Frankfurt.

ECB headquarters in Frankfurt.

The European Central Bank is already looking ahead. European leaders recently decided to make the ECB partially responsible for keeping tabs on the health of the Continent's banks. And according to Euro Group head Jeroen Dijsselbloem, the Frankfurt-based institution is taking the job seriously.

"Now, the ECB is going to look deep into the books and will involve external, independent experts. It is clear to the ECB that its credibility will be harmed if it doesn't make precise checks," Dijsselbloem said in an interview with four European newspapers on Wednesday, including the German daily Süddeutsche Zeitung. "Because as soon as the ECB takes over the central monitoring role over Europe's banks, it becomes responsible."

The European Union tasked the ECB with keeping an eye on banks in the bloc late last year and preparations have been underway since then. Starting in the autumn of 2014, the central bank of the common currency zone will begin monitoring the euro area's largest financial institutions. Should they be unable to prove their financial health before then, however, unwinding them and shutting them down could be an option.

That, though, has become the most controversial element of the banking union plan. On Wednesday, disagreement flared between the European Commission and Germany over who will have the final say when it comes to restructuring wobbly banks. A proposal by Commissioner Michel Barnier, who is in charge of the financial regulation portfolio on Europe's executive body, called for the Commission to have final decision making powers on which banks get restructured.

Adamantly Opposed

Germany, however, is adamantly opposed to that proposal and immediately registered its opposition. German Finance Minister Wolfgang Schäuble said that only national authorities have the power to wind down banks. Anything beyond that would require a change to European Union treaties.

Dijsselbloem too cast doubt on the Commission's plan in his Wednesday interview, saying it was not yet clear who would have the power to close down euro-zone banks that ran into trouble. "It's not completely decided what that authority should look like," he said according to the Guardian, one of the papers that published the interview. "The main thing is it should be effective. You need to be able to decide overnight, over a weekend."

Germany has been extremely skeptical of EU plans for bank oversight for some time, being particularly concerned about a planned fund to be set up to provide emergency assistance when troubled banks need restructuring. Berlin is adamantly opposed to using German money to wind down banks located elsewhere in the EU, which has slowed the effort to install a bank oversight authority as soon as possible. Without funding, such an authority would be unable to close down financial institutions and would be left without teeth. Current plans to create such a fund organically, through contributions from the banks themselves, will take years -- and this has led to calls for interim measures using national funds maintained by individual member states. It is that proposal, among others, to which Berlin objects.

Berlin is particularly concerned about granting Brussels more powers so close to general elections this September. But several other northern European countries have joined Germany in its opposition to the EU plan, too.

Still, Dijsselbloem was at pains on Wednesday to emphasize that most recent decisions had actually placed more onus on the banks, their creditors and customers when it comes to refinancing and preventing a collapse. "First and foremost, it is the banks that bear responsibility," he said. "That is my most important message. We have changed our approach to dealing with ailing banks and who has to pay the bill."

cgh -- with wire reports


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juergenuhlemann 07/11/2013
1. Will they find something?
There are rumors that Irish banks have undeclared debts in their books. I wonder if the ECB would find it, as the Irish government is not knowing(?) it. If the rumors are true than Ireland (Irish banks) would need some form of bailout.
skydrake 07/11/2013
2. Short memory
Germany seems nave forgotten its promises: http://ec.europa.eu/news/economy/121214_en.htm
Manish Gupte, PhD 07/11/2013
3. How to create a financial crisis?
A bank takes 100$ from me then lends 80$. That person puts back 60$ and then the bank lends 40$. So, the bank has 280$ with it. Yes, they "made money". So, if I ask my 100$ then the bank will close. I trust the bank works so I do not ask. Now, if there is negativity, and talk of audit, and talk of closing and failing, then fewer people will trust bank. So banks will be cautious. They will make less out of the 100$ I put it. So..credit crisis!! Banks lend less. Who is spreading negativity!
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