ECB settles the bank resolution issue, makes banking union tangible

The enactment of the European Banking Union emerges now as the next statutory step for Eurozone and the European Union as a whole, if the block is to continue as a solid entity or starts unravelling during the next credit crisis, which might not be very far away. In any case the European Central Bank will be obliged at some point in the near future to start cashing back its extraordinary monetary expansion, which right now must be in the region of €3 trillion. That moment will be very critical for the 5,000 Eurozone banks, most of which rely on ECB’s zero cost liquidity for their existence. From that point onwards the European financial system must be able to deal with a number of bank failures and resolutions. Bank failures Of course the ECB is not the only central bank which has flooded the economy with newly printed money. The American central bank, the Fed, has done a lot more in this field. But now it seems that with the first sign of economic growth the central banks will be obliged to pull back all that liquidity before it sets prices on fire. Ben Bernanke, the President of Fed, left that to be understood some days ago and all the stock markets of the world took a deep dive. Either way the North Atlantic financial markets are soon to be turbulent and the enactment of the European Banking Union is now a one way road for Eurozone. On top of that the creation of the EBU appears also as a must if Eurozone’s south is to be able to survive in it or be forced to leave it. Given that, the current discussion over the EBU has passed in an advanced stage, and now focuses on the content of the Single Supervisory Mechanism and the Single Resolution Mechanism for failing banks. Concerning the first one there is not much to discuss, because the SSM will function under the roof of ECB and this is all there is to it. Bank resolution Coming, however, to the Single Resolution Mechanism there is a lot of questions asked and no answers given, at least not until yesterday. For one thing, what will exactly be the role of the Single Resolution Authority? Will it be doing itself all the resolutions of failing banks or it will have a coordination role and the national authorities will do the job? Is a revision of the European Treaties needed for a SRA to be created and undertake all the bank resolutions in all member states, doing what it takes, including confiscations of money? Now let’s turn to second crucial question over resolutions. That is who is going to pay for them? The European Parliament set very vague rules on what money will be used and to what extend for this bail-in/bailout purpose. Of course shareholders and unsecured creditors go first. Only then the resolution authority, national or single, will confiscate some part of the bank deposits above the €100,000 benchmark (unsecured deposits) and possibly as a last resort ask also for taxpayer/government money. The Parliament also rejected the use of funds form deposit guarantee schemes, existing or to be created. Who is to say what part of the unsecured deposits will be confiscated? What part of the cost the taxpayers are going to cover, if any and how? All those question marks render the whole affair a lot misty. Yesterday though the European Central Bank broke its silence on those matters. Vítor Constâncio, Vice-President of the ECB, delivered yesterday in Brussels a speech on the implications of the Single Supervisory Mechanism (SSM) on the European System of Financial Supervision (ESFS). Naturally the SSM will undertake a lot of the work of ESFS. But this is rather an administrative issue rather than a political one. It seems however that Constâncio found the opportunity to spell out the position of ECB on all those crucial questions about the task and the role of the Single Resolution Mechanism and the Single Resolution Authority. He didn’t restrict himself though to this, but he went a lot further pointing out that the European Stability Mechanism endowed already by the Eurozone member states with €750 billion may partly finance the resolution of failing banks. The following quote is revealing: “From the ECB’s perspective, it is essential that the SRM comprises a Single Resolution Authority and single fund financed by ex-ante and risk-based contributions from the banking sector itself. To remove any doubts over resolution financing, the fund should be able to draw on a common backstop if needed – possibly a credit line from the ESM. Any credit would be repaid via additional levies on banks and thus be fiscally neutral in the medium term. This construction raises certain institutional questions which cannot be answered today, not least related to membership of the ESM. But in our view, an approach based solely on coordination between national authorities without a Single Resolution Authority and without a common backstop would clearly not be sufficient. It would make the Banking Union significantly less attractive for non-euro area Member States, and hence less effective for the EU as a whole”. There is no doubt that some people in Berlin lost their sleep yesterday night, after reading that the ECB proposes to use the German taxpayers’ money parked in the ESM to resolve the failing banks in Spain or Cyprus. In any case this Constâncio intervention transforms the issue of bank resolutions from a misty place into a solid construction. He may ask for ESM money but he clarifies that the banking industry will be charged thereafter with the cost, so the operation will be fiscally neutral. He also clarifies that there should be only one Resolution Authority and not many, because the operations must follow exactly the same rules all over Eurozone. In total the ECB with this step intervenes and sets the rules for the European Banking Union, a task that the politicians are still quarrelling about. Germany still insists that the EBU should be as loose as it may, so that the country’s taxpayer is not involved nor thinks being involved. Elections are coming.