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News on Banking Supervision

By REUTERS on January 5, 2008

The European Commission gave a guarded welcome to a top central banker's call at the weekend for radical change to bank supervision, but analysts doubted the idea would fly.

European Central Bank Vice President Lucas Papademos told a German magazine the ECB, together with other central banks in the 16-nation euro zone, could become the supervisory authority for cross-border banking groups such as BNP Paribas and Deutsche Bank.

This could combine centralised decision-making at the euro area level, with national authorities implementing the decisions, Papademos told Wirtschaftswoche magazine.

 "I believe that we -- the ECB and the Eurosystem -- would perform this task effectively," Papademos said. Eurosystem is the term used to refer to the central banks of the euro zone.

 It is the first time a top ECB member has put forward such a concrete and radical plan, and signals its desire to lend momentum to a debate sparked by the credit crunch and a string of national bank rescue plans.

The industry has already outgrown a system of supervision based on national lines as 45 major cross-border banking groups account for close to 70 percent of EU bank assets.

There are efforts to improve how national supervisors share information about cross-border banks within so-called colleges of supervisors, but still under existing legal systems.

 "We all agree that progress has been made in bank supervision and more progress needs to be made," European Commission spokesman Johannes Laitenberger told a daily news briefing.

The Commission has sole right to propose financial regulation in the EU and its plans to streamline cross-border insurance supervision were diluted by finance ministers who feared losing national powers.

The plans were meant to be a template for banks too.

Commission President, Jose Manuel Barroso has set up a "high level" group headed by former Bank of France Governor, Jacques de Larosiere to propose an overhaul of financial supervision.

Laitenberger said the Commission would await the group's recommendations shortly before making any further comment.

Analysts said Papademos' radical solution would face deeply entrenched national interests and failed to address Britain, the EU's biggest banking centre which is outside the euro zone.

The ECB pushed for a role in supervision several years ago and was rebuffed by finance ministers.

"The ECB is right to do this. I think they are worried nothing big institutionally will be done," said Karel Lannoo of the Centre for European Policy Studies, an EU think tank.

"De Larosiere may come up with proposals but there is hardly any appetite among EU member states to go for big institutional change," Lannoo said.

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