EUROZONE- A STEP CLOSER

At last, the European Parliament has approved the European Central Bank’s role as the EUROZONE single banking supervisor – albeit only from October 2014. But as banks in southern Europe again show signs of weakness, far faster progress towards banking union is essential.

In June last year, banking union was urgently required to restore calm to the EUROZONE financial sector. But as the bloc’s sovereign debt crisis eased, the plan – including the Single Supervisory Mechanism project – lost momentum.

But with ECB accountability to Strasbourg now sorted, today’s agreement on a single supervisor is a proper step towards EUROZONE banking union. True, such a union remains bedevilled by such significant (but linked) matters as the depth of members’ pockets (hello Germany) and the extent to which members’ banks have yet to come clean about their asset quality (hello Spain).

And the extent of the ECB’s bank resolution powers has to be, er, resolved. Germany, for one, wants a veto on the ECB’s ability to shut failed banks.

But as that rumbles in the background, the ECB must make haste to make EUROZONE bank balance sheets more trustworthy. Core tier-one equity ratios have been rendered meaningless by banks that twist asset definitions to suit themselves – often with regulatory indulgence.

The ECB’s looming asset quality review will be critical in restoring trust.

But the ECB needs those decisive executive powers soon. The eurozone banking sector could again be destabilised by Spain, whose regulator is still trying to get its wayward lenders to come clean about their bad loan exposures.

This week’s €1.4bn cash call by Banco Sabadell is a reminder that Spanish capital adequacy is not what it seems. And, like other lenders, Sabadell sits on a bunch of deferred tax assets that will be outlawed under Basel III capital reforms. Spain’s banks need to raise capital in hurry to get with the programme. No wonder there is talk of them selling their property arms and other non-core stuff.

National regulators have proved too soft on their flocks. The ECB needs to call time on that.