European leaders took a step toward creating a single supervisor for all banks in countries that use the Euro today.
The leaders meeting in Brussels said their decisions were key to shoring up banks and eventually giving them access to loans from Europe’s bailout fund.
They plan to have the legal framework for the European banking supervisor in place by Jan. 1, 2013, and say the supervisor needs to be in place before European countries can work on the next big step in their crisis-fighting plan—giving their bailout fund the power to rescue banks directly and bypass national governments.
This step is crucial since banks remain at the core of Europe’s financial problems, with many teetering on the brink of bankruptcy after the investments they made up in boom times having plummeted in value.
Some governments have stepped in to save their banks, such as Spain, but this has only worsened their balance sheets in the process.
So, European leaders want to shield troubled governments from the burden of supporting their banks.
“The objective is simple: we want to break this relationship between the management of banks and the consequences for state budgets,” said Belgian Prime Minister Elio Di Rupo, as he headed into the second day of a summit meeting in Brussels.
“The new system will begin in 2013, and by that year it will operate recapitalizing the banks without the direct participation of governments,” says Italian Premier Mario Monti.
But, German Chancellor Angela Merkel and her allies are singing a different tune. Merkel has repeatedly said the quality of supervision should take precedence over speed.
As such, there’s no firm deadline for the single supervisor to be up and running as yet.
Analysts are skeptical of the deal, however.
“The real question then is whether this is a step towards allowing the European bailout funds to recapitalize banks directly and thus reduce the link between an individual sovereign and its banking system,” says Gary Jenkins of Swordfish Research.
Thorny questions still remain about which banks would be eligible for the direct loans. Ireland was forced into a bailout because of the expense of saving its banks, for instance, but it’s unclear whether its banks would be eligible for relief from the bailout fund.
Leaders move into discussions on foreign policy on Friday, but economic issues were likely to overshadow those talks. On the agenda is how to deal with militants in Mali, a government crackdown in Syria and Iran’s nuclear program.