Fitch Eyes E.U. Prequel of TARP

If you thought that the latest market-moving news out of Europe where the European Central Bank could directly lend and offer aid to troubled banks in Europe sounded a bit like a prelude to the TARP in America, there is a reason.  Now we have Fitch commenting on the ECB plans in supervising eurozone banks.

Fitch has said in a new report that this ECB effort could help to reinforce financial stability in the sector.

Fitch noted (and warned), “It could ensure a consistent application of the rule book and a coordinated regulatory response in times of financial crisis. But a move towards a single supervisor would face numerous challenges and would still have to allow enough flexibility to take account of the different banking practices in existence across Europe.”

The warning called for swift progress involving the ECB to expand its supervision and to give the ECB the decision on “when to activate recovery or resolution plans” to help cut down on the potential for political influence over a bank’s day-to-day activities or over remedial action when things go wrong.

Fitch further warned that many details are missing but said, “In its role as lender of last resort, the ECB can only provide liquidity to solvent banks, so giving it the role of supervising solvency could also reduce uncertainty about when it can step in to provide liquidity.”

Our take… This move would decrease the reliance of local governments having so much power over the banks, but it will also greatly elevate the power of the ECB.  How the ECB will manage to have a greater influence and enforcement of its power remain unknown.

FITCH’S FULL REPORT

JON C. OGG