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).

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.