At last a solid base for the European Banking Union

The Ecofin Council, regrouping the 27 EU ministers of Finance, struck an agreement at 2.00 o’clock this morning over the much debated ‘bank resolution and recovery’ draft directive. As it usually happens in the European Union the final agreement between member states on crucial issues does not go all the way through, but still offers the basic tools to establish a viable and working solution. This time the text agreed doesn’t provide for a strong, central bank resolution authority nor does it contain a bank resolution fund like the European Stability Fund. ESM’s involvement is limited to bank recapitalisation even retroactively, but not in bank resolution. In any case this was a breakthrough agreement that leads to more not less Union. Let’s see the details. Resolution authorities The compromise sets concrete rules for the national resolution authorities. It determines the main resolution measures, the bail-in tools/funds, the liabilities permanently excluded from bail-in like deposits under €100,000 and asks member states, as a general rule, to set up ex-ante resolution funds, to ensure that the resolution tools can be applied effectively. It also provides for national resolution authorities to set minimum requirements for own funds and eligible liabilities (minimum requirements for eligible liabilities – MREL) for each institution. The agreement was concluded only hours before the 27 EU leaders start converging to Brussels for their June Summit at 18.30 h this afternoon. Understandably they are supposed to endorse the Ecofin agreement without changes. Based on article 114 of the European Treaty, the directive requires a qualified majority for adoption by the Council, in agreement with the Parliament. The Ecofin Council called on the Presidency to immediately start negotiations with the legislators with the aim of adopting the directive at first reading before the end of the year. Given that the present Parliament will be resolved in June 2014 in view of the European elections, the directive must be approved the soonest possible so as the Banking Union is enacted before the end of 2014. The two camps The Ecofin Council was divided in two camps. On the one side it was Britain, Sweden, Denmark and France asking for more flexibility. On the other side Germany, Holland and Finland demanded stricter rules so as the bank resolution procedure would offer more reassurances to investors and depositors by setting strict procedures. The final outcome is in between those two positions. The most important points of the agreement are the following: *It will be the national resolution authorities to do the job on the spot. *Banks would be required to draw up recovery plans, and update them annually. *National authorities would have the power to appoint special managers to an institution and even sale all or part of the business. *Deposits of less than €100,000 would be inalienable and covered. *Deposits of physical persons and micro, small and medium enterprises would have preference over the claims of ordinary unsecured, non-preferred creditors and depositors from large corporations. * The bail-in tool would enable resolution authorities to write down or convert into equity the claims of the shareholders and creditors. * Exclusions from bail-in are as follows: covered deposits, secured liabilities including covered bonds, liabilities to employees of failing institutions such as fixed salary and pension benefits, commercial claims relating to goods and services critical for the daily functioning of the institution, liabilities arising from a participation in payment systems which have a remaining maturity of less than seven days, inter-bank liabilities with an original maturity of less than seven days Deposit guarantee scheme There is however a loophole in the exclusion of small depositors from bail in. The Ecofin decision states: “The deposit guarantee scheme (DGS), which would always step in for covered deposits (i.e. deposits below €100,000), would have a higher ranking than eligible deposits”. This means that the DGSs would step in and contribute in the bail-in cost, if the unsecured deposits’ contribution is exhausted. This is an indirect contribution of small depositors to the bail-in cost. However DGSs are given a higher pecking ranking than unsecured deposits. In total the draft directives, one for the direct retroactive recapitalization of banks by the ESM which was agreed last week, and now the agreement on the bank resolution and recovery mechanism, plus the already adopted text of a directive on bank supervision by the European Central Bank create a solid environment for the enactment of the European Banking Union. All those developments will adequately and effectively repair the holes in the European Economic and Monetary Union, thus solidifying the base for the single euro money.