European Commission proposals for a banking union that gives the European Central Bank (ECB) supervision of all eurozone banks were tabled in Strasbourg yesterday (12 September), as a first step towards closer economic and monetary union within the single currency zone.

The reforms, demanded by EU heads of state at their June summit meeting, aim to break the link between banks and governments, preventing heavily indebted countries being sucked further into difficulty by distressed lenders.

The proposals presented by EU Internal Market Commissioner Michel Barnier consist of an EU Council regulation giving the Frankfurt-based ECB unprecedented powers, which will require unanimous agreement of all EU member states.

A second proposal for a regulation to modify the role of the London-based European Banking Authority (EBA) will be subject to co-decision procedure, requiring the European Parliament's consent.

Proposals are controversial

Under the terms of the proposal, the ECB would head the currently fragmented system of national regulators, with the power to police, penalise and even close banks across the eurozone.

The ECB would also gain powers to monitor banks' liquidity closely and require them to keep more capital to protect themselves against future losses.

The proposals are controversial. Germany, though it will be a key member, is concerned that the new supervision will cover all banks including its state banks, or Landesbanken, which enjoy privileged relationships with political administrators in the EU’s largest economy.

London is also worried that the ECB, emboldened by its new powers, will demand regulation that could undermine the city's position as Europe's de-facto financial capital. Similar concerns are shared by Sweden and Denmark.

Meanwhile non-eurozone countries pledged to join the single currency share the objective of protecting their banking industries from any knock-on effects that arise from a large – and well-guaranteed – banking sector on its doorstep, hosting many parent banks with branches and investments held in their territories.

Quick agreement may elude negotiators

These countries also want to ensure that if they join the supervisory mechanism before adopting the euro, any requirements to comply with rules are balanced with rights to see the new super-regulator’s proposals, and voice opinions on these.

The Commission aims to achieve swift agreement to the measures, in the hope that the ECB can be installed in its new role by the beginning of 2013, and begin monitoring half of the eurozone banking sector from the middle of 2013.

Reaching agreement on the terms of the union could be complicated, however, delaying the introduction of the new regime beyond the target set by eurozone leaders. As EurActiv reported, non-eurozone member states have indicated that the EBA regulation could become the focus of delay in the European Parliament.

Proposals to establish a fund to close troubled banks and a fully fledged scheme to protect citizens' deposits across the eurozone will follow.