Europe stumbles over banking union

December 4, 2012: 1:27 PM ET
european central bank
EU finance ministers remain divided over supervisory role for ECB
LONDON (CNNMoney)

As a year-end deadline draws near, European finance ministers failed to agree Tuesday on key elements of a plan to establish a common banking regulator, seen as central to eurozone efforts to emerge from the debt crisis.

The proposed banking union -- agreed by EU heads of state at a summit in October -- and the European Central Bank's commitment to buy bonds of troubled eurozone nations, have been welcomed by investors as bold steps to end the crisis. Any backsliding could unsettle Europe's debt markets after months of relative calm.

By giving the European Central Bank the power to supervise the region's 6,000 lenders, the EU hopes to begin building a firewall between weak banks and national governments. Ireland was bailed out by the EU after it was forced to pump capital into its banking sector, while Spain has been granted funds to keep its banks afloat.

Banks in other eurozone states, including Italy, are facing a further deterioration in asset quality as the recession grinds on, undermining capital levels.

Supervision by the ECB would allow failing banks to draw directly from the eurozone's €500 billion rescue fund -- the European Stability Mechanism -- without their governments falling deeper into debt as a consequence.

Are banks still 'too big to fail'?

But the devil is in the details and Tuesday's talks underlined the gulf between some member states. Germany wants to limit the ECB supervisory remit to big banks, while France thinks it should apply to all.

"France wants the inclusion of all European banks in the supervisory mechanism, under the responsibility of the ECB," French finance minister Pierre Moscovici said on his way into the meeting.

Related: British banks may need more capital

How to include EU states that want to join the banking union but do not share the euro currency is also proving difficult to resolve. Sweden, which falls into that group, wants all participating states to have equal status.

"We think that there should be equal treatment to all members of the European Union that want to join the supervisory board," Swedish finance minister Anders Borg said in Brussels.

The United Kingdom won't join the banking union. It supports the plan, but wants guarantees that London's financial services sector will not be put at a disadvantage.

An EU spokesman confirmed that the finance ministers would try again to resolve their differences at another meeting on Dec. 12, after little progress was made on the role of the ECB and national regulators, voting rules and how to phase in the new supervisory functions during the course of next year.

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