Pre-summit document presses EU banking union

By Luke Baker, Reuters

BRUSSELS — European leaders will discuss specific steps towards a cross-border banking union, closer fiscal integration and the possibility of a debt redemption fund at a summit on June 28-29, according to a document prepared for the meeting.

Two officials familiar with the 10-15 page document, drawn up over the past month and which is still being revised ahead of the summit, said it sets out in detail the four “pillars” required for a strong economic and monetary union which leaders believe is necessary to secure the currency project’s future. As well as progress towards a banking union, the paper discusses the need for a more integrated budget policy, steps required for deeper economic integration, and how to retain “democratic legitimacy” if countries give up some sovereignty. The document has been drafted by European Commission President Jose Manuel Barroso, European Council President Herman Van Rompuy, European Central Bank chief Mario Draghi, and Jean-Claude Juncker, head of the Eurogroup countries using the euro. European leaders have already said the first area they need to work on is a banking integration as they try to break the link between bad banks and indebted governments, with the worsening situation in Spain an immediate concern. EU officials believe that could be achieved in a year, although Berlin wants to see much more progress towards fiscal integration first, something that would require much longer due to the need to change the European Union treaty to achieve it. The document goes into most detail on the banking proposals, setting out the need for a single European banking supervisor, a common EU deposit-guarantee scheme and a single bank-resolution fund to wind down the region’s bad banks, the officials said.

The paper sets out options under each heading, saying that when it comes to a single banking supervisor it could either be charged with overseeing all EU banks, or else look after the major systemic banks with cross-border operations, while another body looks after broader, day-to-day oversight. The expectation is the ECB will eventually be given sole responsibility for overseeing Europe’s biggest banks, while the European Banking Authority watchdog retains a broader oversight role along with coordinating the work of national regulators. On a common deposit insurance mechanism, the paper suggests that there needs to be a strengthening of and closer integration among national guarantee schemes to provide a more reassuring backstop across the whole European Union. On a resolution fund to deal with failing banks, it calls for a single mechanism “with a large envelope” that would be financed via levies on the banking sector, such as a financial transaction tax, and would offer “an integrated EU solution for resolution.” The document, which draws heavily on proposals made by the European Commission on June 6, says an “immediate and permanent mutualization” of risk may be required to backstop the banking sector. It suggests the eurozone’s permanent ESM bailout fund could be used to recapitalize banks directly, rather than having to lend to governments for on-lending to banks. Budget