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Euro-zone leaders call for banking union

by Renee Cordes in Brussels | Published June 27, 2012 at 6:00 AM

European officials called Tuesday, June 26, for the creation of a banking union and regulator for the entire 17-nation euro zone as part of a long-term plan -- short on some key specifics, and immediately undercut by statements of German resistance -- to keep the euro zone together and reclaim some economic stability for the region.

The 10-page blueprint proposes a vision for a "stable and prosperous" currency union founded on four pillars, including common banking supervision and deposit insurance.

"The economic and monetary union (EMU) was established to bring prosperity and stability of Europe. It is a cornerstone of the European Union," said the report, penned by European Union President Herman Van Rompuy, along with European Central Bank President Mario Draghi, European Commission President José Manuel Barroso and Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro zone finance ministers.

They added: "Today the EMU is facing a fundamental challenge. It needs to be strengthened to ensure economic and social welfare."

Although the report was vague on details, it sets the agenda for the EU summit on Thursday and Friday in Brussels, the 19th such gathering since the debt crisis began more than two years ago. It also came up against immediate criticism from Germany for its emphasis on fiscal integration through pooled debt.

"Parts of it read like a wish list," Michael Link, Germany's deputy foreign minister, told journalists in Luxembourg.

In the less controversial area of banking supervision, the paper foresees a European body with supervisory authority and the power to take "preemptive" regulatory action when a bank is in trouble.

"Integrated supervision is essential to ensure the effective application of prudential rules, risk control and crisis prevention throughout the EU," the paper said.

Although not specifically mentioned, the Frankfurt-based European Central Bank could potentially take on this supervisory role, as allowed under the EU's treaty. Although the report is only meant to be a blueprint, the authors said they expect government leaders to reach a "common understanding" at this week's summit.

The call comes a day after Spain, at the forefront of Europe's banking crisis, made a request for aid to its troubled lenders, and investors increasingly fear that the country itself may soon need a bailout.

Separately on Monday, Moody's Investors Service downgraded 28 Spanish lenders, including at least a dozen reduced to junk status, citing concerns about the reduced creditworthiness of the Spanish sovereign and expectations that the banks' exposure to commercial real estate will lead to greater losses -- increasing the likelihood that these banks will need external support.

Nevertheless, the ratings agency said it "views positively" the broad-based support measures being introduced by Madrid to support the banking system as a whole.

It also promised to assess the impact of the upcoming recapitalization program on banks' creditworthiness and bondholders once the final amount, timing and form of funds going to each individual bank are known.

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