European Watchdog Could Get Power to Order Bank Closures

The European Central Bank's watchdog for banks could get the power to order the closure of lenders in what would be a radical step to tackle the crisis, prompting concerns by policymakers that such responsibility could backfire.

The European Central Bank's watchdog for banks could get the power to order the closure of lenders in what would be a radical step to tackle the crisis, prompting concerns by policymakers that such responsibility could backfire.

The plan remains subject to intense debate between the ECB, the European Commission and member states, but officials and policymakers who spoke to Reuters have outlined a framework of how an ECB-sponsored uber-watchdog could work.

Speaking on condition of anonymity, they said the latest plans envisage giving the euro zone's central bank the remit to police far more than just the currency area's 25 top banks, as originally expected.

It is also likely to be allowed step in above national regulators wherever it identifies problems at a smaller lender.

"If you have something for 25 banks, you do not address the issue," said one EU official.

"None of the problems we had in the past related to the top 25 banks. The scope should be all banks. The smaller the bank, the more decisions will take place at a local level."

The blueprint, which is due to be finalised by the EU's executive in the coming weeks and announced in September, is central to building a banking union, forging a unified front among euro zone countries in tackling a five-year bank crisis.

Handing powers of supervision to the ECB also unlocks the possibility of direct aid to banks from the euro zone's permanent rescue scheme, the European Stability Mechanism (ESM), although it is not clear if and when countries would benefit.

The regulating agency, which will be set up under the wing of the ECB, may also be located away from Frankfurt - a choice that divides opinion among countries and officials. The ECB declined to comment.

Moving it away from Germany's financial capital, home to the ECB, could help win broad backing from countries to hand it to control banks around the euro zone.

Such a step could also address some of the ECB's own anxiety about taking on the new supervisory role, which some officials concerned about the central bank ending up in a position where it takes decisions with an impact on national budgets.

Some central bankers are worried that should the ECB get too much responsibility for supervising banks, this may prove unmanageable and backfire later, hurting its image if it fails to spot problems and take action.

One solution to this would be to separate the resolution authority, responsible for winding up troubled banks, from the supervisor. Some central bankers would like to see any winding down of banks carried out under the umbrella of the ESM.