Commission: New proposal for centrally managed bank resolution

Michel Barnier, Member of the EC in charge of Internal Market and Services, participated in the public hearing on financial supervision in the EU which was organised in Brussels. (EC Audiovisual Services, 24/5/2013).

The European Commission is about to honour once more its title as ‘Guardian of the Treaties’. This fundamental Commission’s mandate obliges the EU’s executive to always promote more rather than less Union. In this respect after the French President Francois Hollande and the German Chancellor Angela Merkel agreed in Paris last week, to support a loose banking union with a dispersed in 17 Eurozone capitals the bank resolution mechanism, the Commission is about to come up with a new proposal to undertake itself this role. In this way Brussels will safeguard the central and effective character of the resolution authority.

Around this key issue there are now two well-formed camps. On the one side Germany and its close followers back a loose banking union, now supported half-heartedly by France. On the other side of the fence are firmly placed the European Central Bank and the Commission. ECB says that a banking union without a central and strong bank resolution authority cannot act as catalyst in transmitting effectively its monetary policies for cheap borrowing to all the 17 member states. In view of this the ECB has opposed Berlin’s proposal for an ineffective and dangerously decentralised bank resolution mechanism.

The Commission

In this affair the European Commission is the most fervent supporter of a strong banking union with a central bank resolution mechanism. Michel Barnier, Member of the European Commission in charge of Internal Market and Services has been supporting this option from the very beginning. According to information carried by major news agencies, he is expected today to submit to the College of Commissioners a new proposal bestowing to the EU’s executive the task of resolving and recovering failing banks.

The Commission has proved its abilities in this field on the occasion of the recent incident of the resolution and recovery of two Cypriot banks. In a paper entitled, “A new Financial System for Europe”, Barnier has described in detail his proposal for a central Single Resolution Mechanism for failing banks. This proposal is termed as a pending one by Barnier, probably to be presented today in the College. The Commissioner states that “in addition to the regulatory and supervisory framework applicable in the whole EU, the shared responsibilities and cross-border links within the euro area require specific measures to sustain confidence in the single currency. In particular, a banking union is necessary to break the harmful connections between sovereign debt markets and banks”.

In its long-term planning of the Banking Union and safeguard the euro, the Commission states that the deeper finacial integration is compulsory and of existential importance for the euro area. It should be built on a single rule book of crisis prevention, management and resolution and deposits guarantees for all banks. Given this, it is more than certain that the Commission will not forfeit its long-term planning for an opportunistic agreement between France and Germany.

The Commission’s proposal on recovery and resolution tools for banks in crisis is a key pillar of the new financial regulatory framework that refers to all banks of the European Union. On top of that the practice to make taxpayers pay for the failing banks is self destructive and doesn’t offer a viable solution for the future of the euro area. In view of that the Commission wants to make sure that the taxpayer does not always end up bailing out banks. To avoid this Barnier proposes a common framework of rules and powers to deal with banks in difficulty to be set up by 2015 or earlier. Repeated bailouts of banks have increased public debt and imposed a very heavy burden on government budgets. The euro area cannot survive like that and the Commission is there to see that this is avoided.