European Central Bank president Mario Draghi has said a central banking regulator under ECB auspices is the "only pragmatic" option for Europe, dismissing German claims the bank would be overwhelmed by the task.
Speaking to bankers in Frankfurt, Mr Draghi made the case for the centralised regulator and put himself on a collision course with Berlin, which insists a central regulator should oversee only Europe's top 25 systemic banks.
Mr Draghi contradicted this logic, saying the crisis in interlinked financial markets had shown how "even smaller institutions may turn out to be systemically important".
In the euro area, he pointed out, smaller institutions held a "significant" 30 per cent of total assets.
"Some observers have suggested that the presence in the same institution of monetary policy and supervisory decisions can lead to excessive burdens, a potential confusion of roles and/or distorted incentives," said Mr Draghi to a Frankfurt banking congress.
Concerns about the efficacy of such a large new institution "must be taken seriously", the ECB president said, but central regulation of 6,000 financial institutions was the best option "in the present circumstances".
Only a single supervisor could be "rigorous and even-handed, free from local pressures and interests"; only a single supervisor could "ensure a level playing field", redress fragmentation in the financial system and ensure homogenous implementation of regulations.
He suggested the new regulator, with a legal basis ideally in place by January 1st, 2013, would work on a collegial basis, its board comprising national regulators as "prime actors, not passive performers".
Mr Draghi envisaged a sliding scale of supervisory balance, with national authorities taking over greater responsibility as the institutions grew smaller.
Anticipating Mr Draghi's remarks, a senior finance ministry official in Berlin said on Thursday it was "not practical" for a new ECB-based institution to supervise all EU banks. The official predicted "very intense talks" ahead of next week's EU summit.
Bounce in euro
Meanwhile, the euro rallied yesterday after Germany's closely watched IFO business confidence index broke its seven-month downward trend. The rise to 101.4 points in November countered the pessimistic prediction of another fall.
