Strengthening the European Banking Authority, currently a small regulatory body that relies on national regulators to interact with banks in each EU member country, could help advance the argument for pan-European bank bail-outs. That idea has been advocated by peripheral eurozone bankers and policymakers as a means to break the “feedback loop” between troubled sovereign finances and weak banks in need of state bail-outs.
Some European policymakers see a more powerful pan-EU banking supervisor as a vital pre-requisite for further mutualization of European funding issues, including the potential opening up of the European Stability Mechanism as a bail-out equity investor in banks.
“The main argument against the ESM taking direct bank stakes is that currently it is up to national authorities to decide on the financing needs of their own troubled institutions,” said one European official. “If a European entity is going to inject money into a bank it needs to have confidence in the numbers.”
Mr Draghi’s calls for more centralization of supervision are likely to meet with resistance elsewhere.
Less than two years old, the EBA has a small staff and its efforts to run tough stress tests and force recapitalization of weak banks have drawn public criticism and private resistance from a number of national regulators.
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