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The EU also called for a single regulator
-- probably the European Central Bank -- to oversee Europe's banks. Currently, banks are regulated by their national governments and some countries have been slow to recognize loan problems and shut down their worst banks. As part of a broad "banking union," the new regulator will likely get power to close failing banks if their national regulators won't do it. The plan is also expected to include deposit insurance across Europe. Individual European countries now insure bank deposits within their borders. But bank failures could overwhelm those national funds. The bank overhaul is supposed to be completed by the end of the year. Finance ministers from the 17 countries that use the euro are supposed to work out many of the details at a July 9 meeting. The leaders said they were committed to linking their countries closer together economically and politically, but didn't discuss how. Such integration would likely require countries to give up some of their taxing and spending powers to a European budget authority. Most analysts cheered the EU plans but worried about the questions left unanswered. And they said the bailout funds are too small to handle the tasks that could be thrown at them. Europe's two bailout funds have a combined $625 billion in lending power; up to $125 billion of that is already committed to helping Spain bail out its banks. The remaining $500 billion looks small compared with $3.1 trillion in Spanish and Italian bonds outstanding. Europe doesn't just have a government debt crisis. It has a banking crisis, too. A collapse in housing prices buried Spanish and Irish banks in bad real estate loans. At the same time, banks across Europe have been the biggest buyers of their governments' bonds. So as yields have surged and the bonds have declined in value, banks have suffered losses. The solution hovering in the background, say some economists, is the European Central Bank. The ECB could buy any amount of government bonds, backed if need be by the bank's theoretically limitless power to create money. So far the bank has been unwilling to take this step, which could violate its mandate to fight inflation and a ban on central bank financing of national governments. Some analysts said the growing coordination among Europe's leaders could give ECB President Mario Draghi more wiggle room. "This gives the ECB cover to reward them for their good behavior," said Jay Bryson, an economist at Wells Fargo Securities. The ECB's next policy meeting is Thursday in Frankfurt. The summit deal leaves out crucial details of just how any bank bailouts would work. Would bank creditors have to take a loss on their investments, or would taxpayers foot the whole bill? The deal didn't specify. If the banking regulator and a rescue fund take ownership stakes in failed banks, manage those stakes in the taxpayer interest while forcing losses on shareholders and creditors, it could be positive, said Clemens Fuest, an expert in public finance at Oxford University's Said Business School. Otherwise, simply charging taxpayers could be "a huge burden on growth in Europe for a very long time," Clemens said.
[Associated
Press;
Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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