Is the European Banking Union an impossible task?

ECOFIN Council 21/6/2013. Wolfgang Schauble, German Federal Minister for Finance, Pierre Moscovici, French Minister of Finance (from left to right) (Council of the European Union photographic library).

ECOFIN Council 21/6/2013. Wolfgang Schauble, German Federal Minister for Finance (sitting), Pierre Moscovici, French Minister of Finance (from left to right,) (Council of the European Union photographic library).

As the European Sting informed its readers last Saturday, the Banking Union divided deeply the entire European Union. For the first time the Ecofin Council, in a Press release issued after its meeting, made no reference at all to the most vehemently discussed item in its agenda that is the “Rules for Bank Recovery and Resolution”. The head-on confrontation was unusually strong. On the reactive side was Sweden and of course Britain.

Those two dissident countries are insisting that the 17 Eurozone member states of the EU are heading towards uncharted waters, aboard their proposal for a central bank resolution authority financed by the European Stability Mechanism. This combination, they argue, may end up in dragging everybody down to the abyss. On the other side of the fence things are even mistier. It’s not certain if Germany is opposing the duo of Britain and Sweden. After the meeting Wolfgang Schauble, the German minister of Finance, said simply that there was no deal, while Pierre Moscovici, his French colleague, likened an agreement with trying to achieve the impossible.

Who says what?

Reportedly the meeting will be resumed tomorrow, Wednesday, probably through a teleconference and try to conclude an agreement ahead of the European Council of the EU leaders on 27 and 28 June. There is only one certainty over this dilemma and this is the Commission’s adamant clear position favouring the option of a strong, central bank resolution authority financed by the ESM. The Commission also proposes it could undertake this task by itself. This position is also supported by the European Central Bank, but in this case it is the politicians in Brussels and the other capitals who decide, not the central bankers.

Naturally the problem is who is going to pay and with what, if a major Eurozone bank runs into trouble and the need appears to resolve or rescue it. Seemingly there is general consensus on the line of funds to be used in this operation. First will go the shareholders, followed by the unsecured creditors and only then the unsecured depositors will be asked to contribute to the bank resolution or recovery cost.

This is exactly what happened in the case of the two Cyprus banks. The largest of them, the Laiki (Popular) Bank was totally liquidated at a great cost to its large depositors, with accounts above the €100,000 benchmark. The second largest bank of the island the Cyprus Bank was rescued, again at a great cost to its large depositors.

What if a major bank fails?

Let’s examine however a potential case, where a core Eurozone bank operating in many countries needs to be resolved or rescued. What happens if the money of shareholders and unsecured creditors and depositors is not enough to cover the obligations of the under liquidation lender? Will there be exemptions in confiscating large depositors’ money, like pension funds? On top of that will there be a contribution of taxpayers through the country’s government budget and to what extent? It is also questionable, if there will be a contribution from a deposit guarantee scheme, despite the fact that the EU Parliament forbids that.

As it is easily understood all those answers are costly and may even be proved impossible to be honoured, given the “terra incognita” that lies within the lender’s balance sheets and off balance sheet accounts. On top of that everybody agrees that presently all the systemic Eurozone and British banks are undercapitalised, a fact that makes everything riskier.

Add to that the forthcoming elections in Germany, where the slightest reference to more obligations being loaded to the country’s taxpayers is out of the question at least until September and an agreement in Wednesday’s meeting of the Ecofin Council becomes even more impossible. In short the European Banking union and its core institution, the Bank Resolution and Recovery Authority, are always in the air. Once more the banks threaten to render the European Banking Union an impossible task.

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