THE EUROPEAN Central Bank (ECB) could be given significant extra powers in a shake-up of euro zone bank supervision, according to a senior official at the Frankfurt-based institution.

ECB vice-president Lucas Papademos said the bank could take responsibility for policing large banks operating across national borders in the 16-country euro zone, working in conjunction with national central banks.

His comments are the clearest signal yet that the ECB believes the global financial market crisis requires a rethink of regulation across the Continent.

Although Europe avoided seeing a bank collapse on the scale of Lehman Brothers, European policymakers fear the existing fragmented structure, based largely on national institutions, leaves the region dangerously exposed.

So far ECB president Jean-Claude Trichet has stopped short of suggesting explicitly that the powers of the Frankfurt-based institution should be enhanced. But in an interview last month he said it was “clear that we can improve the present framework”.

Mr Papademos, who has responsibility for issues concerning financial stability, went significantly further in an interview with Wirtschaftswoche, the German business magazine.

He argued that EU plans to strengthen co-operation between supervisors within the existing framework could “work over the medium term, but it is not likely to be the best solution in the long run”. Mr Papademos argued that, in the euro zone, the ECB and national central banks, which comprise the so-called “eurosystem”, “could become the supervisory authority for cross-border banking groups. Such a structure could combine centralised decision-making at the euro-area level with decentralised implementation by the competent national authorities. I believe that we – the ECB and the eurosystem – would perform this task effectively,” Mr Papademos said. – (Financial Times service)

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