The main elements of the banks' supervision mechanism remain as agreed late last year. The ECB will directly supervise about 150 large banks with assets worth more than €30bn or constituting at least 20 per cent of their home country's gross domestic product.
The remaining banks will remain under the direct purview of national regulators although the ECB will be the overarching regulator. Non-eurozone banks will not be directly affected by the new legislation.
“The single supervisor is the core element of banking union and a vital step in breaking the vicious link between the banks and the sovereigns,” said Michael Noonan, the Irish finance minister who spearheaded the negotiations for member states.
The deal aims to restore confidence among investors over the long-term stability of the eurozone's banking sector, which came under considerable stress during the sovereign debt crisis and the credit crunch.
“This is the first fundamental step towards a real banking union which must restore confidence in the eurozone's bank and ensure the solidity and reliability of the banking sector,” said Michel Barnier, the EU commissioner responsible for the proposal.
Eoin Treacy's view The winding down of Laiki bank bears a striking resemblance to how a Eurozone version of the FDIC's methodology might operate. Deposits of €100,000 have been protected while bond and equity holders will be wiped out and the remaining deposits will make up the difference. One might ask why this approach was not adopted from the outset of the Eurozone's banking problems since it puts the onus of responsibility on the lenders to a failed institution rather than the citizens of the country in which that bank is domiciled. (Also see Comment of the Day on November 14th).
It most certainly offers a favourable template for future problems, not least because it protects the balance sheet of sovereign states which might then be called on to help recapitalise the sector at a later stage. The question though is whether this practice will be used as a template in systemically more important countries such as Spain and Italy should the need arise. This remains debatable given the vacillation that has been a hallmark of the European approach to date.
A willingness to wind down failed institutions is a novel concept in Europe and necessitates a reappraisal of the risk attached to various institutions that have been supported with ECB lifelines over the last four years. It is possible that bears will yet test the resolve of the ECB with a bigger country.
Spain and Italy have experienced the greatest stock market reaction since Cyprus's issues intensified. The Euro Stoxx Banks Index continues to extend its decline, led lower by Spanish and Italian institutions. A sustained move above 115 would be required to break the progression of lower rally highs and check downward momentum. The Euro will need to sustain a move above $1.30 to question the consistency of its short-term downtrend.