The European Union has reached a deal on the legal framework for a centralised banking supervisor that will have the power to directly bailout troubled banks.
Under the deal, the so-called Single Supervisory Mechanism would receive sweeping powers to supervise some 6,000 banks throughout the eurozone, as well as in other European countries that chose to join the supervision scheme.
Once it is fully set up by mid-2014, the SSM will pave the way for the European Stability Mechanism – the eurozone’s permanent bailout fund – to directly recapitalise the region’s struggling banks, breaking the link between the sovereign and bank crises that some countries are facing.
"This vicious circle, where banking and sovereign debt mutually reinforce themselves, is largely responsible for recession, poverty and unemployment in many countries," European Parliament President Martin Schulz said.
“This is a first fundamental step toward a real banking union which must restore confidence in the eurozone’s banks and ensure the solidity and reliability of the banking sector,” said EU Internal Market Commissioner Michel Barnier.
The deal came hours before the Cyprus parliament firmly rejected a controversial bailout package that would have seen it become the fourth eurozone nation to be rescued by international lenders.
The tiny island-state has become the latest country to be dragged down by its banks, which had amassed balance sheets worth about eight times the country’s annual economic output of 18 billion euros ($23.3 billion).
To finance the bank recapitalisations, the troika – the International Monetary Fund, the European Commission and the European Central Bank – proposed a 10 billion euros bailout on the condition that the Cypriot government impose a one-time bank levy on its savers.
In an apparent reference to the banking crisis in Cyprus, Barnier said "the eurozone is at this moment exposed to difficulties."
On Wednesday, European lawmakers are expected to reach final agreement with member states on implementing capital and liquidity rules for the region's banks and setting a cap on bonuses – steps to what the EU hopes will eventually be a full region-wide banking union.