At the last European Union summit, leaders agreed to establish a banking oversight authority. It remains unclear, however, what such a system might look like. The European Central Bank is to play a role, but can it maintain its independence?

Mario Draghi, aware of the potential for embarrassment, warned last week that the latest major project in the euro zone could not be allowed to pose any “threat to the reputation” of his European Central Bank (ECB).

The concern is justified. In the future, Draghi’s staff will not just be expected to shape monetary policy, but also to supervise banks in the euro zone, according to the decision reached at the last European Union summit. A new, cross-border “supervisory mechanism” is to be created, if possible by early 2013 according to a summit paper. This was the condition under which the German government agreed to allow the permanent bailout fund, the European Stability Mechanism (ESM), to inject capital directly into ailing banks.

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