EU agrees to new banking regulator

European Union banks are getting a new monitor, which will have the ability to require them to hold more capital and unwind those that are hurting the system.

Here are some of the details from the Wall Street Journal:

European Union finance ministers reached a landmark deal early Thursday that would bring many of the continent’s banks under a single supervisor, in what governments hope will be a major step toward resolving their three-year-old debt crisis.

Ministers said the European Central Bank would start policing the most important and vulnerable banks in the euro zone and other countries that choose to join the new supervisory regime next year. Once it takes over, the ECB will be able to force banks to raise their capital buffers and even shut down unsafe lenders.

German Finance Minister Wolfgang Schäuble said national parliaments will be able to ratify the new supervisor by the end of February and “we should have the supervisor in place by the first of March.”

The EU’s Internal Markets Commissioner Michel Barnier, in a tweet, called the agreement “historic.” “Taking these decisions on the supervisor was a night well spent,” he added.

With the deal, which still needs to be signed off by the European Parliament, the currency union has cleared the first real hurdle on the road to a “banking union,” designed to cut the debilitating link between weak banks and their governments.

The huge costs of bailing out failing lenders have already forced Ireland, Spain and Cyprus to ask for help from the currency union’s bailout funds, taking on large debts in the process. Because of that euro-zone leaders decided in June that, once an effective banking supervisor has been set up, they would allow their rescue funds to recapitalize banks directly—thereby shielding their governments from going down with them.

Here’s a few more pieces of the deal from the New York Times:

The pact was hashed out in an all-night session of finance ministers that ended Thursday morning after France and Germany made significant compromises. Under the agreement, between 100 and 200 large banks in the euro zone will fall under the direct supervision of the European Central Bank.

A round of talks a week earlier broke up amid French-German discord over how many banks in the currency union should be covered by the new system.

In a concession to Germany, the finance ministers agreed that thousands of smaller banks would be primarily overseen by national regulators. But to satisfy the French, who wanted all euro zone banks to be held accountable, the E.C.B. would be able to take over supervision of any bank in the region at any time.

The agreement by the finance ministers, which still requires the approval of the European Parliament and some national parliaments including the German Bundestag, made it possible for E.U. leaders arriving here later Thursday to gather in a spirit unity.

One of the most important pieces is that banks that need help can request it directly from the E.C.B. Here’s how, according to Bloomberg:

Under today’s agreement, euro-area finance ministers could use the ESM to recapitalize banks directly if they make a unanimous request to the ECB to take over direct oversight of a troubled institution. Finance chiefs will need to develop guidelines for when they might offer aid to banks, instead of going through national governments as they did with Spain’s financial-sector rescue program.

Dutch Finance Minister Jeroen Dijsselbloem said the timing of bank aid remains up in the air. “We did not make any agreement on when banks can expect direct recapitalization from the ESM,” he said.

The oversight deal also lays out size thresholds for banks to get direct ECB supervision once the new system is in place. Ministers agreed on central oversight for banks with more than 30 billion euros in assets or with balance sheets that represent at least 20 percent of a nation’s economic output. The guidelines include at least the top three biggest banks of every participating nation unless “justified by particular circumstances.”

What will be interesting to see is how investors, especially those who take stakes in banks and their debt, react to the news. It should help standardize bank valuations across those that are overseen by the E.U. But there are many details to work out and for large, multi-national banks, it’s yet another regulator they’ll have to comply with, increasing costs across the board.