EU Commission and ECB rebuff Germany on the Banking Union

Participation of Michel Barnier, Member of the European Commission in charge of Internal Market and Services at the public hearing on Financial Supervision in the EU. (EC Audiovisual Services, 24/05/2013).

Michel Barnier the European Commissioner responsible for the Internal Market and Services in a clear-cut way broke yesterday Commission’s silence and joined the European Central Bank’s approach, over the creation of an effective European Banking Union, able to guarantee that failing or about to fail banks will be duly resolved or managed by one central and powerful European Resolution Authority. This new institution will be doing the job itself in a uniform and transparent manner all over the Eurozone and for all bank sizes. In this context the national resolution authorities will play only an auxiliary role.

Speaking yesterday in the European Parliament’s Economic and Monetary Affairs Committee, Michel Barnier confirmed that the Commission will propose the creation of a single resolution authority to deal with all banks in trouble. In this way he gave a clear indication of the model the Commission envisages and he stressed that the authority, “will do more than just coordinate work between national authorities”. He then added, “We have seen the limits of coordination.”

Obviously the soundness of the Eurozone bank resolution mechanism is crucial for the credibility of the future European Baking Union. No banking system has any creditworthiness if it is not known ex ante who is overseeing the banks and what happens in case they go bust. Then the next question to be asked is who is going to pay for the resolution? The European Parliament set very vague rules on what money will be used and to what extend in this bail-in/bailout procedure. Of course shareholders and unsecured creditors go first. Only then the resolution authority will ‘use’ some part of the bank deposits above the €100,000 benchmark (secured deposits) and possibly as a last resort ask for taxpayer/government money or money from the ESM.

Commission and ECB

Last Friday, the Vice-President of the European Central Bank Vítor Constâncio had also broken ECB’s silence on this issue and answered all those questions. He said that the central bank is in favour of one single bank resolution authority for the entire Eurozone. This institution in order to perform its duty should be able even to borrow from the European Stability Mechanism. In this way the ESM will be acting as a common backstop. Thus the ECB supports the idea of creating a seamless financial market all over Eurozone, which will guarantee the same borrowing cost for the same business risk throughout the euro area. Undoubtedly the ECB is not overshooting its mandate by that as Berlin could have argued, because according to its statute its major task is to make sure that the monetary policy is applied evenly all over Eurozone.

The relevant passage of ECB’s Vice-President speech went like this: “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”.

The issue of bank supervision has been clarified months ago with the ECB undertaking it, through the creation of a completely new and distinct section under its roof. Unfortunately the question of banks’ resolution in case of a failure remains in the air, because Germany wants it to be a loose mechanism, without mutualisation of risks. The ECB through Vítor Constâncio however rebuffed this ineffective approach and proposed a central resolution mechanism with solid financial base on the ESM.

Solid bank resolution

This antithesis about the structure of the resolution mechanism is very substantial. A central one for the entire Eurozone with a solid financial base in the ESM can guarantee uniform, effective and transparent action throughout the euro area. If the task is left to 17 national resolution authorities, without a common strong financial base, then the Eurozone’s financial system would continue to be fragmented as it is today. Such a prospect would perpetuate all today’s drawbacks of the South, establishing for good the country risk and depriving the borrowers there from being favoured by the low-cost money from ECB. Italian, Greek, Spanish, Portuguese and some more countries’ SMEs would continue to pay triple interest rate than their German counterparts for exactly the same business risks.

Yesterday the European Commission through Michel Barnier came in the fore and clarified once and for all that there must be one bank resolution authority for the entire Eurozone. In this way the ECB and the European Commission have isolated Germany. Barnier went even further and said that there is no need to modify the European Treaty for that, at least not now. At this point it must be reminded that Germany insists that there is such a need, obviously trying to delay the whole affair of the European Banking Union. Barnier added however that he acknowledges the German worries, but he stressed that a treaty change could be envisaged at a later date, to perfect a banking union that would be already up and running.