Mercator Perspectives

EU Leaders Agree on Greater Banking Oversight

European Union leaders recently celebrated a new agreement that would place all banks operating in the eurozone under a single oversight body with the aim of securing the future of the common currency and moving Europe towards greater interdependence on banking issues.

The region’s largest financial body, the European Central Bank, under the agreement will supervise between 100 and 200 major financial institutions with thousands of smaller banks and credit unions remaining under control of national regulators in each of the respective member states. Mario Draghi, the president of the central bank, said the agreement “marks an important step towards a stable economic and monetary union, and toward further European integration.”

Under the terms of the agreement, banks with more than €30 billion ($39 billion USD) in assets, or assets greater than 20 percent of their country’s gross domestic product would fall under the supervision of the central bank. In return for the broader central bank powers, member states in the eurozone will have greater leeway to challenge the central bank’s decisions. Furthermore, financial institutions in the United Kingdom will be exempt from central oversight as Britain fought for its independence as a hub for international banking. The chancellor of the Exchequer (the UK equivalent of the Secretary of the Treasury), George Osborne said on the agreement, “The safeguards we have secured protect Britain’s interests and the integrity of the European single market, it shows that when Britain takes a tough stance but based on strong principle, Britain can win the argument and protect our interests.”

While some members of the EU were able to gain concessions from the agreement like the United Kingdom, others such as Spain and Ireland will be forced to comply as part of the deal to receive bailout money for troubled banks. The supervisory body within the central bank, however, is not expected to be fully functional until 2014 at the earliest, meaning that the intended benefits of greater interdependence will not be witnessed for some time.

For much of the past few years, failures of banks across the continent and questions whether the euro would survive as a currency have dominated the headlines out of the European financial sector. While this particular move does not rule out any of the lingering concerns, it does show that Europe is moving towards a broader economic union and will attempt to maintain all members in the eurozone. For the payments industry, this means one should expect increased financial regulation and supervision by public officials when working in Europe, but at the same time continue to make operating in Europe simpler. Dealing with one currency is easier than the 17 individual countries that make up the eurozone. As German Chancellor Angela Merkel stated, the agreement “cannot be appreciated highly enough.”

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