European Union leaders have reached a deal to set up a joint supervisory body for Euro Zone banks next year as the first step towards a banking union in the single currency area.
They agreed last night at the start of their two-day summit in Brussels to create the legal framework for the gigantic project by the end of this year and to begin its operation gradually next year.
Under the plan, more than 6,000 banks in the 17-nation euro zone will be put under the single supervisory body, which will be led by the European Central Bank (ECB) based in Frankfurt.
Announcing the agreement at the end of the opening session, which lasted until early Friday, President of the European Council Herman Van Rompuy said the Single Supervisory Mechanism (SSM), which aims to prevent banking risks and cross-border contagion, is an important step towards a stable economic and monetary union.
As soon as the SSM comes into force in 2013, it will open the way for the euro zone’s permanent bailout fund, the European Stability Mechanism (ESM), to recapitalise the troubled banks directly, Rompuy said in a press statement.
The euro zone finance ministers will work out the modalities of the ESM injecting capital directly into banks, without adding to their Governments’ debts.
The ECB, which has a central role in the supervisory body, has been given powers to intervene directly in any euro zone banks, Rompuy said.
The EU leaders also agreed that the ECB’s banking supervisory functions will be strictly separated from its monetary responsibilities.
The single supervisory body is the first step towards a “complete integrated framework for the financial sector,” Rompuy said.
“Other steps also need to be taken quickly, starting with harmonising national resolution and deposit guarantee schemes,” he said.
The overall goal is to make the euro fully stable — financially, economically and politically.
“Without a stable monetary union, there cannot be a stable European Union,” Rompuy said.