Supervision plan would cover all Irish banks

Ireland’s banking sector is to be supervised entirely by a new European financial regulator, under a compromise banking union proposal to be circulated by Berlin this week.

Ahead of crunch meetings in Brussels, Germany has proposed the new regulator supervises not just large, cross-border banks but also institutions that have received state assistance in recent years.

According to Der Spiegel, German officials have suggested the new regulator could be located in Paris, rather than the European Central Bank in Frankfurt. In return, Berlin wants weighted voting at regulator level, rather than the one-country, one-vote system of the ECB governing council.

With its proposals, Germany is hoping to break weeks of deadlock before leaders arrive on Thursday for their last summit of the year. “We are all working very hard to have a legal basis for the banking regulator before Christmas,” said German finance minister Wolfgang Schäuble to Bild am Sonntag newspaper yesterday. “Building up a regulator can then begin in 2013.”

Compromising tone

His was a more compromising tone than last week, when Mr Schäuble’s hard line contributed to a finance minister meeting breaking up.

Originally, Berlin favoured a central regulator only for 25 systemic banks, leaving oversight of smaller lenders with national regulators. The ECB position, backed by Paris and others, is that all 6,200 European lenders should be regulated centrally. The lesson of the euro zone crisis, the ECB says, is that smaller banks can cause financial havoc.

Germany’s compromise would see European supervision extended to lenders not envisioned by its original position. These would include Allied Irish Banks, 99 per cent State-owned after a €20 billion recapitalisation, and Bank of Ireland, which stayed out of State control but accepted a €3.5 billion recapitalisation in 2009.

For Berlin, its proposal has a twist: it would leave its Sparkasse banks, largely unscathed by the crisis, under national regulation while forcing regulation on the Landesbanks. Almost all these lenders, owned by German federal states, required public money and are viewed with disdain in Berlin as redundant.