ECB to become chief euro bank supervisor

The establishment of ECB supervision is set to become a prerequisite for banks to receive direct loans from the European Stability Mechanism, the eurozone bailout fund. All 17 member states have endorsed ECB's regulatory role, but fear power may corrupt.

The European Banking Authority was set up in 2011 to integrate rules across the EU and has secured a new supervisory function.

“We want to know what kinds of banks we supervise,” Joerg Asmussen, an ECB executive board member said.

Draft legislation says the ECB must conduct a “comprehensive assessment, including a balance-sheet assessment,” of any banks it will directly supervise.

By gaining a new supervisory role, it consolidates more influence in lending decisions, which could make loans more subjective than objective. Chief economist of the IMF, Oliver Blanchard, has long warned against the danger of central banks becoming too powerful. Blanchard, and others, warn the more power the central banks wield, the more difficult it will be to separated from politics.

"Being supervisor allows the ECB to discriminate between zombie banks and those that are sound and make sure that its lending targets those banks that lend to the economy - not to the zombies," said Daniel Gros, from the Center for European Policy Studies, Reuters reported.

Since the recession, the roles of major central banks, including the ECB, the US Federal Reserve, and the Bank of England, have greatly increased in providing banking supervision and oversight and been an anchor of recovery.

The ECB foots the bill for a large portion of the European financial system, last year it provided 1 trillion euros of cheap three-year loans to struggling banks.

Stress test delays

The new supervisory role will delay planned banking regulation stress tests, which evaluate and diagnosed the capabilities of lenders.

The last stress test was performed in 2011, and were highly criticized for not properly identifying non-robust lenders.

Eight banks failed the examination in 2011 with a combined deficit of 2.5 billion euros ($3.2 billion) according to Bloomberg.