EU agrees to set up single eurozone banking supervisor

The two-day European Union summit in Brussels this week has resulted in leaders of the 27-member state region shaking hands on the decision to set up a single eurozone banking supervisor.

This is a major step towards banking union and the legislative framework will be put in place by January 1st 2013, with the body starting its operations in 2013.

However, the decision was not reached easily, as it appears to be a compromise between France and Germany, who disagreed earlier at the conference over the timing and number of banks the European Central Bank (ECB) would oversee as part of this new measure.

The ECB would lead the mechanism and be granted the power to get involved in any bank within the 17-nation single currency bloc.

EU Commission president Jose Manuel Barroso stated the ECB will be able to "intervene if needed in any bank in the euro area" – and with these new powers the central bank would be able to act swiftly to prevent systematically dangerous debt accumulation on a bank's balance sheets.

France and the EU Commission ideally wanted joint banking union supervision, with the ECB taking the lead role and becoming operational in January of next year, but German chancellor Angela Merkel made it clear that national budget discipline should be prioritised.

The region's largest economy has been at loggerheads with the European Commission over the proposal of ECB regulation and previously, the German government expressed a desire to retain supervisory responsibility within Germany over the country's state-owned banks that play a crucial role in the economies and state finances of Germany's federal zones.

Nevertheless, Ms Merkel has said the agreement was that the banking sector needs to be overseen in a "differentiated way", meaning "some will be direct … at the ECB level and others indirectly via the national authorities".

At 11:44 BST, the German Dax was lower by 0.6 per cent to an index value of 7387.1 points and the Cac 40 slipped 0.6 per cent to 3513.1 points.

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