The European Union’s awkward compromise agreement on the single supervisory mechanism (SSM) on December 13 keeps the European Commission’s proposals for a banking union on track. This is just as well since the commission had set itself an end-of-year deadline, and the mechanism is a core part of the euro zone’s efforts to recapitalize its banks and resolve its debt crisis. But it won’t be the final word on the banking union or even on the SSM. Further rows about banking supervision are all but inevitable, as are tougher battles over a Europe-wide deposit guarantee scheme and a resolution fund for winding down failed banks, the other two projected pillars of the banking union.

The European Council meeting in Brussels agreed that “the SSM will be composed of the European Central Bank and of national supervisory authorities,” conceding in that sentence that the singular character of the supervisory mechanism is questionable. The ECB will, from March 2014 at the earliest, directly supervise euro zone banks’ holding assets of €30 billion ($39.5 billion) or more, or less if they represent 20 percent of national GDP. This is likely to mean that only about 150 out of 6,000 EU banks will see a change in the way they are supervised. The Council also agreed on a separation of the ECB’s role in administering monetary policy with the creation of a dedicated supervisory board within the central bank. ....