By Simon Miller

The European Council is proposing a single banking supervisor for the entire European Union according to a discussion paper released today ahead of the eurozone summit on Thursday.

Although it recognises differences between euro and non-euro areas, the document proposes a single European supervisory body that would have "ultimate responsibility'.

The paper said: "An integrated financial framework should cover all EU Member States, whilst allowing for specific differentiations between euro and non-euro area member states on certain parts of the new framework that are preponderantly linked to the functioning of the monetary union and the stability of the euro area rather than to the single market."

The proposal for a single banking supervisory system could lead to a major row between the UK and Germany which supports the idea of putting the European Central Bank (ECB) in charge of eurozone bank regulation and an extension of European-level powers could see the UK government exercising its veto. 

The role of the European Banking Authority appears to have been diminished as the document fails to mention it, leading to speculation that it would be neutered in favour of the ECB. 

The paper continues: "The current architecture should evolve as soon as possible towards a single European banking supervision system with a European and a national level. The European level would have ultimate responsibility."

The text argues that such a system would "ensure that the supervision of banks in all EU Member States is equally effective in reducing the probability of bank failures and preventing the need for intervention by joint deposit guarantees or resolution funds".

It added: "To this end, the European level would be given supervisory authority and pre-emptive intervention powers applicable to all banks. Its direct involvement would vary depending on the size and nature of banks. The possibilities foreseen under Article 127(6) TFEU regarding the conferral upon the European Central Bank of powers of supervision over banks in the euro area would be fully explored."

In his introduction, the European Council's president Herman Van Rompuy wrote: "The report proposes to move, over the next decade, towards a stronger EMU architecture, based on integrated frameworks for the financial sector, for budgetary matters and for economic policy. All these elements should be buttressed by strengthened democratic legitimacy and accountability."

The discussion paper can be foundhere.

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