Doubts Greet Plan for a New Euro Zone Bank Regulator

Facing a bank crisis in Spain and the prospect of outbreaks in other major countries, European leaders have pledged to establish a new agency aimed at curbing problems afflicting lenders in the euro zone.

Yet for now the proposal amounts to little more than a vague statement of intent, one that has prompted more questions than answers. Will the new regulator have the power to rein in risky practices and hold offending banks accountable, for example, and will it be willing to exercise that power? Or will it be weak and overly beholden to national political factors that have too often gotten in the way of making bank supervision effective in Europe?

It is not a moot point, given that two rounds of stress tests by another Pan-European agency gave passing grades to most banks in countries that use the euro currency, including some that turned out to be deeply troubled and in need of bailouts, contributing to a crisis of confidence in Europe’s financial system.

“Creating a common supervisor is an important step in the right direction, but we still don’t know whether it will be a brand new agency or an existing one with minor changes,” said Antonio Garcia Pascual, chief economist for Southern Europe at Barclays in London. “What’s important is that this agency ends the inadequate examination of lenders, from national champions to small savings banks, due to factors like local resistance and political interference.”

European officials say they understand these concerns, adding that their latest move represents an attempt to move away from reliance on national regulators that have failed to detect systemic faults.

Making it work is critical. In the short term, a signal of tighter regulation in the future — along with bailouts for troubled banks — is needed to stem the flight of capital from countries with banking problems, which threatened to spread to financial institutions throughout Europe. And in the longer term, by agreeing to cede power over banks, European countries hope Germany will trust them more and eventually stand ready to share euro zone debt, which could help them ease austerity measures and adopt pro-growth plans to revive their struggling economies.

The plan for a stronger, Europewide bank regulator, the result of an all-night session held during a summit meeting of European Union heads of state and government last week, called for an “effective single supervisory mechanism” for banks in the 17 nations using the euro.

The proposal was a “major breakthrough” in efforts to solve Europe’s economic woes, said Herman Van Rompuy, president of the European Council, representing the union’s leaders. The agreement buoyed markets, but investors will be watching to see whether European authorities deliver as promised.

The next step is for the European Commission, the executive office of the union, to draw up draft legislation in close coordination with euro zone finance officials. European leaders would meet to complete the arrangements before the end of the year.

To work properly, the new authority will need far greater powers than the European Banking Authority, which itself is less than two years old. The banking authority lost credibility after it conducted two rounds of stress tests on European banks but failed to highlight the sector’s looming problems, particularly those in Spain.

The plan agreed to on Friday in Brussels envisions the involvement of an institution that has a reputation for rigor: the European Central Bank. The central bank also is the one institution in Europe with enough financial firepower to ward off an economic catastrophe.

After the summit meeting, Mario Draghi, the central bank’s president, told reporters that “allowing the E.C.B. to take up supervisory tasks for the euro area” was among decisions made by leaders that were “fully in line” with the bank’s mandate.

Placing a head office for the new agency at the European Central Bank, and delegating officials from the agency to work alongside national supervisors to ensure that systemic problems are detected sooner, could mean hiring hundreds of staff members to cope with hands-on duties like on-site visits at banks.

“Considering the options, the E.C.B. probably is the best choice for this supervisory role, yet this also could be a poisoned chalice for the E.C.B.,” said Daniel Gros, director of the Center for European Policy Studies, a research organization.

“We know there are pockets of weakness in European banking, and uncovering that there’s more dirt in those balance sheets doesn’t exactly make you popular,” Mr. Gros said. “My guess is that the E.C.B. has some very hard choices in front of it about the extent of its supervisory role.”

To succeed, the European Central Bank will have to do a much better job than the European Banking Authority, whose powers have been severely limited by its structure and its lack of a mandate to carry out direct supervision of banks.

“The E.B.A. has lost a bit of credibility, frankly, after the stress tests didn’t detect such grave problems, particularly in Spain,” Mr. Pascual of Barclays said.

The plan announced on Friday was part of a larger bargain at the two-day summit meeting.

Countries led by Germany agreed to allow a new, permanent European bailout fund to recapitalize banks directly — a crucial demand by Italian and Spanish leaders, who want aid for their lenders without deepening their public debt. In exchange, Germany and its allies won more rigorous centralized authority over lenders.

The bailout fund — the European Stability Mechanism, which is to have effective firepower of about 500 billion euros ($633 billion) — should go into effect in coming weeks, once it is ratified by countries making up 90 percent of the fund’s capital.

The European Union has also been drawing up plans for a so-called banking union, which would include rules to shore up or wind down troubled banks in the euro zone.

Those proposals would require member states that have not yet done so to set up so-called resolution funds, possibly in concert with other euro zone countries. National authorities would be required to intervene in troubled banks by firing management or forcing sales.

But those plans still keep much decision-making at the national level, and some analysts warned over the weekend that the new supervisory agency could be powerless to fix problems unless it had the full authority to require recapitalization, sell-offs and even closure of banks.

“We now know that the European Stability Mechanism should have the money to recapitalize banks,” said Guntram B. Wolff, deputy director of Bruegel, a research organization. “But who is going to decide how to split up banks, and who is going to decide which creditors take the losses?

“We still don’t really know who would be in charge of bank resolution, and yet that’s as important as supervision if you want to ensure a stable banking system and a stable euro zone.”