Commission to decide on bank resolution issues

Michel Barnier, Member of the EC in charge of Internal Market and Services, delivered today a Press conference on an European Commission’s proposal for a Single Resolution Mechanism to deal with failing banks which will complement the Single Supervisory Mechanism (SSM)(EC Audiovisual services, 10/7/2013)

The European Commission, the European Central Bank and the International Monetary Fund are planning to challenge once more the supremacy of Germany in the Ecofin Council and bring back the issue of the single bank resolution authority. The clash over the character of this cornerstone building-block of the European Banking Union is some weeks old and what is at stake has to do with the properties of the resolution mechanism.

Germany insists on the need for decentralised and consequently loose resolution authorities based in the 17 Eurozone capitals, while the Commission, the ECB and the IMF propose a strong and central resolution authority based in Brussels. Germany hypocritically argues that the enactment of a strong, central resolution authority demands a change in the Treaties of the European Union, a procedure that may take years to accomplish.

In respect with this antithesis the Sting writer Maria Milouv wrote yesterday after Tuesday’s Ecofin Council: “This position for centrally managed bank resolutions was held also by the European Central Bank, the European Commission and Ollie Rehn personally. Unfortunately Germany insisted that resolutions should be left to national authorities. Berlin didn’t want a central resolution authority because in case of a big bank failure there might surface obligations which would have to be born centrally” and thus weigh also on the German taxpayer. On top of that Berlin fears that a powerful central resolution authority might decide at some point in the future to close down one of the many problematic regional German banks and ask the country’s taxpayers to pay for the cost.

Berlin won the first round in the June Ecofin council and managed to pass a text going like that: “The proposed directive is aimed at providing national authorities with common powers and instruments to pre-empt bank crises and to resolve any financial institution in an orderly manner in the event of failure, whilst preserving essential bank operations and minimising taxpayers’ exposure to losses”.

This wording however does not necessarily exclude the creation of a single central resolution authority, for example in Brussels under the auspices of the Commission, with executive arms in national capitals or the participation of national authorities as minority representatives. This last option was chosen today by the Commission, and the the EU’s executive proposed to have the last word on almost everything, as reported below.

As things turned out today the EU Commission, without saying it, proposed itself to be nominated as the central bank resolution authority aided by the ECB and national representatives. This was clearly indicated even from yesterday by Rehn when he commented that “This week, the Commission will move to put in place the next building block of the banking union with our proposal for a Single Resolution Mechanism, in fact on Wednesday. It will be a well-grounded and ambitious proposal, because this is a big challenge and it demands a bold response. I hope that Member States will show a similar level of ambition as discussions on this move forward in the coming months”.

Earlier today the Commission issued a statement under the title “Commission proposes Single Resolution Mechanism for the Banking Union”. Commission President José Manuel Barroso said: “With this proposal, all the elements are on the table for a banking union to put the sector on a sounder footing, restore confidence and overcome fragmentation in financial markets. We have already agreed common European supervision for banks in the euro area and other Member States who wish to take part. Today’s proposal complements that with a strong and integrated single system for dealing with failing banks. We cannot eliminate the risk of future bank failures, but with the Single Resolution Mechanism and the Resolution Fund it should be banks themselves – and not European taxpayers – who should shoulder the burden of losses in the future.”

It is more than clear that the Commission insists on the creation of a strong and central bank resolution authority and mechanism. As Barroso points out it’s logical that the single supervision of Eurozone’s banks by the ECB should be accompanied by a single resolution authority. The cooperation between the Commission and the ECB is very close and productive.

According to today’s Commission proposal the Single Resolution Board will be made up by representatives from the ECB, the European Commission and the relevant national authorities (those where the bank has its headquarters as well as branches and/or subsidiaries). Obviously the central authorities, the Commission and the ECB, would control the majority of votes in this Board. It goes without saying that there will be only one board based in Brussels, probably in Commission’s headquarters and not 17 ‘outlets’ in national capitals. In total the Commission’s role would be to decide the triggering of the resolution of a bank and set the resolution framework, “ensuring its consistency with the Single Market and with EU rules on state aid, and safeguarding the independence and accountability of the overall mechanism”.

The European Parliament has consistently called for greater integration in the arrangements for resolving banks, and in a Resolution adopted on 13 June 2013 urged the Commission to adopt as quickly as possible the proposal establishing the Single Resolution Mechanism. It remains to be seen if Germany will be able to repel once more the prospect of a central bank resolution authority and mechanism.

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