EU Commission challenges Berlin by proposing breakthrough legislation on banks

In an inspired speech last Friday, in Helsinki the European Commissioner Michel Barnier, speaking at the 4th Annual Economic Forum, made crystal clear that the Commission has not abandoned the target of a strong and effective European Banking Union. He stressed that “We cannot have a genuine Economic and Monetary Union without a Banking Union”. Of course he clarified that this new EU institution will also make sure that the umbilical cord between the major national banks in certain member states and the sovereigns is cut off. The Centre for European Studies, a Brussels think tank, close to the European People’s Party, organised during the Forum a conference entitled, “Banking sector, finance and regulation: a strong pillar for the real economy”. The EU Commissioner participated in it and delivered a speech entitled “Financial regulation: laying sound foundations for stability and growth in Europe”. This tribune was the best opportunity for Michel Barnier to address the burning issue of the EBU and more precisely the single bank resolution authority and the single bank resolution mechanism. A breakthrough This issue has become a core theme for those like Barnier, who want a genuine EBU guaranteeing that the more than 6,000 Eurozone banks are being supervised effectively and can be trusted as guardians of value and effective financial intermediaries. He said that in the new and more controlled and demanding but safer financial environment of the EBU, it has to be ascertained that the Eurozone’s banks would be able to serve the real economy and more so the small and medium enterprises, securing financial services, “In particular to SMEs, which are highly dependent on bank financing”. He commenced his speech by taking stock of the work that has been done so far for the banking union. He mentioned the agreement between the EU Parliament, the Commission and the Councils over the Capital Requirements Directive, the so-called ‘CRD IV package’, applicable in all 27 member states. He continued however and observed that this is not enough for Eurozone, obviously because the 17 euro area countries operate in a single currency union. In this environment however the countries of the south are disadvantaged, because they were not accustomed to a strong currency environment and today they are almost completely cut off from the core Eurozone financial markets. As result their real business sector and particularly their SMEs are suffocated without financial backing. At this point Barnier found the opportunity to make a crucial announcement stating that “We (the Commission) will propose a Single Resolution Mechanism this summer”. He also announced that “for countries belonging to the Banking Union, we need to establish a common resolution fund. With one centralised resolution authority”. By this statement he totally opposed the opinion expressed by the German Minister of Finance Wolfgang Schäuble, who insists that the enactment of a central resolution authority presupposes a change in the EU Treaty, let alone the establishment of a common resolution fund. Actually this problem is a very real one, because a common bank resolution fund would mutualise the risks hidden in the balance sheets of all Eurozone lenders. The Commission believes though that such a fund can be created without a change in the EU Treaty, and they argue that it can be fully embedded in the EU legal framework afterwards. One real banking union Before that Barnier had observed that the supervision of Eurozone banks by the European Central Bank “will open the possibility for the European Stability Mechanism to recapitalise ailing banks”. This is of course another bugbear for Germany, because Berlin bluntly denies sharing directly the Spanish, Greek, Italian and French bank risks through the ESM. Up to now the ESM is recapitalising the Greek, Spanish and Irish banks, but through loans to the corresponding governments, thus making the sovereigns liable for the risks and the money to be returned . In this line of thinking Barnier also confirmed that the “Directive on Bank recovery and resolution. I hope it will be adopted in the next few days”. This is the new legal text defining the use of funds in cases of bank resolutions. By this statement Barnier confirmed what was already known, that is the order of funds to be confiscated in bail-ins. He said “shareholders, creditors and all other parties need to know in advance what to expect; while making sure that deposits under 100,000 Euros stay protected”. This is what happened in Cyprus at a time when this Regulation was not yet approved. All in all Barnier confirmed that the European Commission will not back off in front of the German obstinacy. Actually the Commission in this affair is not following the usual practice of holding back action, which could damage the electoral prospects of a government. In this case the proposed mutualisation of banking risks for all Eurozone countries is a very unpopular issue in Germany. Obviously this Barnier announcement, if exploited by the opposition, may hamper Chancellor Merkel’s prospects for a triumphant win in the September election.