European Central Bank President Jean Claude Trichet told the Financial Times in a video interview, that ‘a quantum leap’ in the reinforcement of fiscal surveillance in the Eurozone is necessary. On Sunday, Trichet will chair a key meeting of the Basel Committee on Banking Supervision, which will decide on new capital reserve rules for banks.

Herman Van Rompuy, the European Union’s president, is due to report in coming weeks on a revamped system of economic governance and the ECB favours tough rules and sanctions to avoid new episodes of fiscal mismanagement in the common currency area in future.

Trichet says the ECB wants ‘quasi-automaticity’ of procedures and sanctions rather than depending on peer reactions. The central bank has called for a reinforced independent focus on the fiscal situation and surveillance of competitiveness and imbalances in euro area member countries. It also wants decisive measures to enhance the quality of statistics.

The ECB president said the bank had fiercely opposed the position of the heads of government of the three major countries in the common currency area when they wanted to weaken the stability and growth pact, back in 2004 and 2005. He said it was a very, very fierce battle. They wanted to really unravel the pact.

Trichet said during the sovereign debt crisis last May, that the euro area was not close to disaster at all - - seen from inside. He said seen from the outside, it’s always difficult for external observers to judge and analyse correctly the capacity of Europe to face up to exceptional difficulties.

Basel III

The Basel Committee on Banking Supervision will meet on Sunday to agree new rules that may force lenders to increase reserves.

Banking supervisors and central bankers from 27 countries will gather in Basel, Switzerland at the Bank for International Settlements and while there is reported to be support for requiring banks to hold core tier one capital - - basically equity and retained profits - - of  5% of their risk-weighted assets, compared with the current rule 2% in the so-called Basel II rules. Banks would also have to hold a buffer of additional capital equal to 2-3% of assets, meaning banks, which fall below a core tier one ratio of at least 7-8%, would face restrictions on their ability to pay dividends and bonuses.

"This is tantamount to raising capital requirements, which is why we reject fixed capital buffers," Hans-Joachim Massenberg, the Association of German Banks' Deputy General Manager.Massenberg said on Monday. By contrast, the German private banks support countercyclical buffers. "Nevertheless, a number of issues remain to be clarified, particularly with respect to precisely how the buffer will operate."

FT Video