The European Commission on Friday set a date of September 11 to announce proposals to overhaul banking regulation in Europe,a crucial step in shoring up the euro zone against future crises.
A new Pan-European regulatory system must be established before countries that use the euro can tap bailout funds to recapitalise their banks without taking on more sovereign debt,breaking the so-called doom loop in which frail banks can endanger national finances and push countries toward full bailouts.
Spain,which has won approval for a multibillion-euro recapitalisation of its banks,has already indicated that it wants to receive euro bailout funds.
But European leaders,including Chancellor Angela Merkel of Germany,have made it clear that countries wishing to use bailout funds to recapitalise their banks directly will be able to do so only once there is better supervision and control of the banks that benefit from such rescues.
The commission,the European Unions executive body,was tasked with drafting the banking proposals after European leaders,at a meeting in June,committed to giving the European Central Bank a leading role in the new supervisory system.
To work properly,the new banking regulator will need far greater powers than the existing European Banking Authority,which is only about two years old. The banking authority lost credibility after it conducted two rounds of stress tests on European banks but failed to highlight the sectors looming problems,particularly those in Spain.
In a statement,the commission said it would specify the central banks new role and its relationship with national supervisors. Putting the central bank in charge could greatly diminish the possibility of political interference in banking regulation by reducing the ability of countries to protect favoured lenders.
It said it would also address whether banks outside the euro area would fall under the purview of the new system and to what extent the existing banking agency would maintain a supervisory role.
The commission said that its goal was to make the proposals on September 11,but that the date was not final. It said the new system was to enter into force early in 2013,although analysts have said there may be delays.