Germany may prove right rejecting Commission’s bank resolution scheme

ECON Committee meeting discussion with Commissioner Michel Barnier in charge of Internal Market and Services (on the right) on bank reform. In the Chair, Arlene McCarthy (S&D, UK) (in the middle), (European Parliament Audiovisual Services, 16/09/2013).

ECON Committee meeting discussion with Commissioner Michel Barnier in charge of Internal Market and Services (on the right) on bank reform. In the Chair, Arlene McCarthy (S&D, UK) (in the middle), (European Parliament Audiovisual Services, 16/09/2013).

Commissioner Michel Barnier, responsible for financial services, had a rough time yesterday at the Economic and Monetary Affairs Committee (ECON) of the European Parliament, when he told the legislators that the Commission will press ahead with its proposal about the creation under its own roof of the Single Resolution Mechanism (SRM) for Eurozone’s failing banks. He stressed that this can be done without a change in the Treaty of the European Union and added that the EU can insert a relevant amendment in the text of the new Treaty, whenever there will be one. Germany has already expressed its strong disapproval for the creation of an SRM as the Commission wants it without a change in the Treaty.

The questions the MEPs asked Barnier obviously doubted the legality and the soundness of the Commission’s proposal. They also questioned the viability of the source of funds to be used in eventual resolutions of Eurozone banks. The Committee will have an initial detailed discussion of the Commission’s proposed legislation this morning. The negative climate that prevailed yesterday in the ECON Committee doesn’t leave much hope that the Commission’s proposal will have an easy time either. Tough questions come from across the political spectrum.

Second blow

This is a second blow this proposal takes in a matter of a few days. Last Friday during the first meeting of the ECOFIN council, after the summer vacations that took place in the Lithuanian capital Vilnius, there was only a vague reference to this burning issue. There were no reports at all whether the SRM was discussed in the Eurogroup council, which is made up by the 17 ministers of Finance of the euro area countries and presumably it’s them who care most about the issue. Not even Michel Barnier, who was present in Vilnius said anything in public about it. The conclusion was that nobody wanted to discuss openly this issue during last weekend in the Lithuanian capital.

Coming back to ECON Committee’s session, Barnier faced yesterday key questions by legislators about this Commission’s proposal on the SRM. Before presenting that it must be noted that the creation of the SRM divides deeply the Eurozone countries, as well as the 28 EU members. Not to forget that this mechanism is the most important part of the Banking Union, that everybody agrees on the urgent need for its creation.

Commission’s SRM

As it is now clear, the Commission has finally decided to propose a Single Resolution Mechanism propelled by a Single Resolution Authority to be enacted under its own roof in Brussels. According to the executive arm of the EU, this SRA should have access to funding because it is highly possible that the resolution of a failing bank will leave behind liabilities which have to be covered. In view of this need of funds the Commission adds that a resolution fund should also be created, which will be capitalized by a small levy imposed regularly on all banks. If a resolution occurs before enough capital is accumulated in this fund the authority should be able to borrow from the European Stability Mechanism and pay the money back when the fund has stored enough wealth.

However all these proposals are a bit far-fetched. It’s very uncertain how this resolution levy will be imposed on all Eurozone banks. Would all of them be obliged to pay the same levy? If not, how will it be customized? The prudent and the careless bankers will pay the same levy? Will it be a tax? If not a tax then what?

In short, it is quite uncertain when or even if at all this levy is to be imposed. Only last week the Commission’s own legal service advised that the imposition of a special financial tax (The European financial transaction tax – FTT) in twelve willing to do so EU countries (Tobin Tax), is illegal. On top of that the European Court of Justice ruled that the power given to the EU markets watchdog, the European Securities and Markets Authority (ESMA), to ban certain types of short selling, was illegal. All that mean that the legality and the fairness of a levy on all Eurozone banks to finance the resolution of the ones that go bust, is utterly uncertain. Consequently, if the resolution task is realised by the European Commission, the liabilities to be left behind a failing lender will create new obligations, which will be eventually covered by the ESM. In this way the burden to resolve for example an imprudent Greek or Spanish bank will be diffused to all Eurozone member states according to their participation in the ESM.

Mutualising the risks

Germany is the largest contributor to ESM and will thus pay also the largest part of the liabilities that the resolution of this possibly Greek or Spanish careless lender will leave uncovered. This is not at all fair, because everybody knows that a lot of banks in member states are up to their heads in not always clean dealings with their governments and local businesses. The less clean those dealings, the more prone the banks are to go bust and burden the German taxpayer. This is exactly what Germany wants to avoid and demands for a change in the Treaty. The reasoning behind is that such a mutualisation of financial risks has to have very strong political and legal foundations, because it will mutualise financial responsibilities that nobody can estimate their magnitude. It is an open secret that the banks hide in their books immeasurable risks not always quite clean.

No wonder why MEPs from across the political spectrum pressed the Commissioner yesterday for more details about the enactment and the workings of the bank resolution regime. “Would the Commission push ahead with its plans despite Germany’s resistance? asked Peter Simon (S&D, DE). Could the planned EU resolution fund borrow money from the European Stability Mechanism (ESM) until it was fully capitalised by banks’ contributions? asked Wolf Klinz (ALDE, DE)”. Mr Barnier answered he did not see any problem with the new fund borrowing from the ESM or from other sources. Responding to Mr Simon, he said he was open to amending the treaties but did not see this as a pre-requisite.

All the answers Barnier gave are quite open to criticism. If the resolution authority starts borrowing from the ESM to deal with failing banks, as the Commissioner proposed, the Mechanism may soon end up dry and unable to perform the task it was created for that is to support the Eurozone member states in need. Then Barnier almost carelessly added that the resolution authority may borrow “from other sources”, as if the streets of Brussels were full of other financial sources. Last but not least, his answer to Peter Simon going approximately like this, “let’s first create the resolution authority and then legalise it with a change in the Treaty”, must have made Barnier look sloppy and superficial. No surprise if this Commission proposal would be met with strong reservations today when the MEPs will discuss it in-depth.

There is no doubt that this Commission proposal may end up in the dustbin and the German proposal for the ‘nationalisation and decentralisation of bank resolutions’ goes ahead.

the sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Sahel States need international support ‘now more than ever’– UN peacekeeping chief

Mali’s ‘self-defence’ groups must face justice, after deadly intercommunal attacks

How drones can manage the food supply chain and tell you if what you eat is sustainable

Coronavirus: Commission approves new contract for a potential COVID-19 vaccine with Novavax

Trump’s Russian affair spills over and upsets Europe

New forms of work: deal on measures boosting workers’ rights

Hiring is broken. Here’s how to fix it

Except Poland, can climate change also wait until 2021 for the EU Market Stability Reserve to be launched?

UK: Customs Union with EU or a longer delay of Brexit

Here’s how businesses can make the circular economy a reality

A young student discusses the determinants of migration in the European Union

Arlington, USA: kick-off of the fifth round of the EU-US boxing match

Mergers: Commission waives the commitments made by Takeda to obtain clearance of its acquisition of Shire

EU boosts sustainable cocoa production in Côte d’Ivoire, Ghana and Cameroon

The hazards of “heroism” in the time of COVID-19

Working together to end the AIDS-HIV pandemic

Migration crisis update: What are the chances of a fair deal at this EU Summit?

How bad is the Eurozone economy? The ECB thinks too bad

Draghi hands over to banks €77.7 billion more

Eurostat confirms a dangerously fast falling inflation in Eurozone

Australian homes are turning to solar power in record numbers

The revenge of the fallen

Bosnia and Herzegovina: EU allocates additional €3.5 million to support vulnerable refugees and migrants

Venezuela: ‘Shocked’ by alleged torture, death of navy captain, UN human rights chief urges ‘in-depth’ investigation

EU budget: Commission helps prepare new Cohesion programmes with Regional Competitiveness Index and Eurobarometer

Bias in AI is a real problem. Here’s what we should do about it

The digital building blocks of better communities

Border management: Commission welcomes political agreement towards making European Travel Information and Authorisation System operational

Electronic cigarettes – The alternative we’ve been looking for?

FROM THE FIELD: Balancing act for Philippines farmers

How Bangladesh’s leaders should respond to the economic threats of COVID-19

How to ensure fair AI throughout the supply chain

Commission launches the Fit for Future Platform and invites experts to join

Nigeria: Armed conflict continues to uproot thousands, driving up humanitarian need

Continue reforms to make growth work for all in Spain

Here’s how to rebut the climate doom-mongers

Quarantine: A mental health guide for every mood

Rule of law: First Annual Report on the Rule of Law situation across the European Union

Further reforms can foster more inclusive labour markets in The Netherlands

‘Education transforms lives’ says UN chief on first-ever International Day

Vienna has the world’s best quality of living

Primary Care: a way to provide Palliative Care in Universal Health Coverage

Team Europe: Digital4Development Hub launched to help shape a fair digital future across the globe

Deal reached on EU fund to help regions and businesses adapt to Brexit

More women and girls needed in the sciences to solve world’s biggest challenges

It is impossible to end HIV without SRHR

Europe led by Germany seems vulnerable to Trump’s threats

Work to make the world a better place: 5 things you need to know about ‘green jobs’

The right approach to addressing overcapacity problem from a Chinese perspective

Central Asia: the European Union matches political commitment with further concrete support

Plans to keep EU budget funding in 2020 in the event of a no-deal Brexit

WEF Davos 2016 LIVE: “If we do not do properly the Paris agreement, then all 16 remaining goals will be undermined”, UN Secretary General Ban Ki-moon cautions from Davos

MWC 2016 LIVE: Gamelab founder talks Apple TV, VR and monetisation

SPB TV @ MWC14: The TV of the Future

ILO and EIB join forces for more and better quality employment

Rural women a ‘powerful force’ for global climate action: UN Secretary-General

Click and Download: your app is ready to help you save lives

Uzbekistan wins its long fight against malaria, as global rates continue to rise

State aid: Commission approves €73 million of Italian support to compensate Alitalia for further damages suffered due to coronavirus outbreak

EU Parliament and Council: Close to agreement on the bank resolution mechanism

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s