Ecofin: ‘The Friday battle’ for the banking union

Michel Barnier, Member of the European Commission, Michael Noonan, Irish Minister for Finance and President of the Ecofin Council (from left to right). (EU Council photographic library 14/05/2013).

The crucial character of this Friday’s Ecofin Council can be seen in the size of the Commission’s preparative memo. More than 3,000 words were needed for it. The text of yesterday’s Press release contains everything, from the specific economic policy recommendations to countries with excessive deficits, the entry of Croatia, the €10 billion capital increase of the European Investment Bank, the return of Ireland and Portugal to financial markets and the fight against tax fraud and evasion. All those issues however will be discussed with a procedural manner, because there is very little to negotiate upon. Everything is almost finalised or very far away from a crucial turn.

Country recommendations will be approved, Croatia will be welcomed, Ireland and Portugal will continue their course to market financing, the EIB capital increase is already bearing some fruits and the anti-tax-evasion policies will continue to crawl. In short there is almost nothing there to report, analyse or comment upon.

The banking union revisited

As it usually happens the important things come towards the end of Commission’s announcements. This time the news came under the heading of “Rules for Bank Recovery and Resolution”. The European Sting has been following this issue very closely. Only yesterday Sting writer Suzan A. Kane observed that, “the EU is about to enact a Banking Union… This new institution will make sure that the presently fragmented and even locking out some countries EU financial market is there for everybody“.

A strong banking union however needs a strong, uniform, central and financially sound procedure for potential bank resolutions and recoveries. Such a financial instrument though may create in the future large costs to taxpayers, that cannot be reliably estimated in case say of another banking crisis. European Union countries borrowed heavily to support their banking systems during the last four years and nobody can forget that. The repercussions of the crazy days of 2008-2009 will be tormenting the Union and the world for many years to come.

€4.5 trillion for banks

According to the Commission “In order to maintain essential financial services for citizens and businesses, governments have had to inject public money into banks and issue guarantees on an unprecedented scale: between October 2008 and October 2011, the European Commission approved €4.5 trillion (equivalent to 37% of EU GDP) of state aid measures to financial institutions. This averted massive banking failure, but has burdened taxpayers with deteriorating public finances and failed to settle the question of how to deal with large cross-border banks in trouble”.

Let’s return to the present. It’s obvious then, that the creation of a central and strong bank resolution authority, with the financial backing of the European Stability Mechanism will make all the Eurozone countries (which co-finance the ESM) collectively liable to banking accidents in any one of them. It’s not only that. In almost all Eurozone member states the balance sheets of their major commercial banks are closely interconnected with the country’s sovereign in many respects. Consequently the end result may be that the future bank resolution authority could end up recovering entire countries not only banks. The cases of the Irish banking crisis in 2010 and of Spain in 2011 are perfect examples of that.

In theory, those dangers are minimised by the fact that from now on the European Central Bank will be closely supervising the 200 systemic banks of Eurozone and through the national central banks, all the 6,000 lenders of the money zone. Still the problem remains that even if the ECB finds very close connections between major commercial banks and national government accounts, it will be impossible to ask for a quick clearance. Financial divorces between major commercial banks and governments may take years to be concluded.

On top of that, information from Brussels and major Eurozone capitals pose now another crucial question, related to the implication of the bank resolution authority deeply in member state national issues, even touching defence and security matters. The same is true though for ECB’s supervision on systemic banks. Apart from that the same circles question the criteria to be used by this authority in deciding to resolve or recover a troubled commercial bank in a certain member state.

Cyprus or Holland?

Those circles cite the example of Eurogroup’s double criteria, in the case of the resolution and recovery of two Cyprus and one Dutch banks three months ago. The Eurogroup, acting de facto as a resolution authority, decided to shut down the largest Cypriot bank, the Popular Bank of Cyprus and confiscated its deposits, while at the same time allowed the Dutch government to use taxpayers’ money to rescue the failing SNS REAAL financial group. In this respect the Commission recognises that, “Very few rules exist which determine what actions should be taken by authorities in the case of a banking crisis. That is why the G20 agreed that crisis prevention and crisis management frameworks had to be set up”.

The authority of the Commission

Given all that the Commission reportedly nurtures the idea to undertake itself the bank resolution and recovery task, indicating its history of confidentiality, impartiality, effectiveness, and ability in negotiations. Michel Barnier, the responsible Commissioner for internal market has clearly supported the creation of one central and strong bank resolution authority supported by the ESM. This time he goes a bit further. He sets a deadline for the Ecofin to decide the creation and the character of it. In yesterday’s Press release it is clearly noted that “Commissioner Barnier welcomes the efforts and commitment of the Irish Presidency to reach agreement on the proposal by the summer, in line with the conclusions of the European Council of December 2012”.

Still this is not enough for Barnier. The memo also stresses that “Moreover, the Commission urges the Council to reach a general approach and to maintain a high level of ambition. In particular, national flexibility around bail-in is appropriate in certain cases but it must also be properly limited. Too much flexibility could result in a patchwork of 27 (soon 28) systems and a fragmentation of the single market”.
What else could mean this ‘general approach’ and ‘high level of ambition’ than a central and strong resolution authority, in order to avoid a new fragmentation of Eurozone’s financial market. At this point it has to be noted that Barnier is not alone in it. Along with him Ollie Rehn and President Barroso have both expressed the same ideas.

All in all it looks like in this Friday’s Ecofin Council one more battle is to take place, between those who want more union and those who support the union only when they profit from it. Germany has recorded only gains from the European Union all along its 60 years of existence and also has pocketed huge sums from ‘helping’ in the rescue of Greece, Portugal, Ireland and Spain. This time however the Commission is united and has decided to oppose Germany’s negative attitude towards more Union. The first clashes will take place at tonight’s Eurogroup.

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