Eurozone slowly but surely builds its Banking Union

From left to right: Olli Rehn, Vice President of the European Commission, Rimantas Sadzius, Lithuanian Minister for Finance, Michel Barnier, Member of the European Commission, in a joint Press conference after the Ecofin was concluded. Luxembourg 15/10/2013. (Council of the European Union, Photographic Library).

From left to right: Olli Rehn, Vice President of the European Commission, Rimantas Sadzius, Lithuanian Minister for Finance, Michel Barnier, Member of the European Commission, delivering a joint Press conference after the Ecofin was concluded yesterday. Luxembourg, 15/10/2013. (Council of the European Union, Photographic Library).

The Ecofin council, a regrouping of the 28 ministers of Finance of the European Union, yesterday confirmed the creation of the first pillar of the European Banking Union, by approving the regulation for the Single Supervisory Mechanism (SSM) to be built under the roof of the European Central Bank. This was a rather typical procedure, because the core Eurozone countries had already agreed on the main functional characteristics of the new institution.

However, there were two innovations yesterday. First, the Ecofin’s decision was headed by a raster typed in italic lettering, entitled “Main results of the Council”, indirectly defining how the SSM will be staffed. Secondly, after the Council was concluded, the President of the Commission Manuel Barroso and Commissioner Michel Barnier issued a statement focusing not at the SSM, but on the single resolution mechanism, the still missing other pillar for the establishment of the Baking Union. Let’s take one thing at a time.

German managers everywhere

It was a real revelation yesterday to see that the Ecofin’s decision approving the creation of the SSM had as its heading this text: “The single supervisory mechanism will be composed of the European Central Bank and the supervisory authorities of the member states”. This is not news, but knowing how things are done in the Brussels, this heading is almost a proclamation that the high-ranking positions in the new Mechanism will be covered by Germans or by people under Germanic influence.

So, important is the top job in the SSM, that the horse trading around it will probably include and the Presidency of the next European Commission. By the way, Martin Schulz, a German social democrat, currently President of the EU Parliament, appears as a strong contestant for Commission’s Presidency, especially after visiting yesterday Pope Francis in the Vatican, and now going around with His benediction, to help him in his new quests.

Berlin’s strategy in Brussels

Berlin may keep low tones in and about Brussels when the audience is wide and the question is Germany’s role in the EU. In the corridors of power however, away from the eyes of the public opinion, the Teutons are fighting with everything they’ve got to put their own people in positions of power in every important European institution. And they do have a lot of ammunition in these crucial battles, the outcome of which shapes Europe’s and more so Eurozone’s future.

On the pretext that the President of the ECB, Mario Draghi, is not a German, Berlin is expected to demand that the head of the SSM should be a Teuton. Mind you that despite the fact the SSM will be created under the roof of ECB, this doesn’t mean Mario Draghi would have the final word on which bank needs what or even worse if it has to be resolved. It will be the head and the council of the SSM to decide that and ECB’s President will not be able to reverse these decisions.

At this point, it must be mentioned that SSM’s mandate goes as far as deciding the annihilation of a bank. The resolution of a bank will be realised of course by the Single Resolution Mechanism (SRM), which is under discussion now. However from what has been made known so far, the crucial decision, if a bank can be saved or if it is beyond limit of repair and has to be resolved will be taken by the SSM, and then the lender will be handed over to SRM for the rest.

Barroso and Barnier

Passing now to the statements of President Barroso and Commissioner Barnier, following the Council’s final approval of the creation of the Single Supervisory Mechanism (SRM), it was a monument of tenacity and strong conviction. They both concentrated their attention to what is coming next. Given that more or less the role and mandate of the SSM have already being agreed, the SRM is still under negotiation.

The European Sting has followed the issue of the SRM very closely. Last Saturday the Sting writer Suzan A. Kane wrote, “There is no doubt that Eurozone’s banking sector is in bad shape. In view of that, the Union has agreed to introduce the Bank recovery and resolution Directive (BRRD), which provides that taxpayers would not be any more burdened by failing banks…It remains, however, to be determined who will decide and undertake the task of resolving or recovering bankrupt or in danger of bankruptcy banks…Berlin is quite reluctant to let anybody else to decide to resolve a German bank. Berlin also opposes the idea of spreading obligations which may stem from a resolution of a non-German bank over the entire Eurozone. On the other side of the fence, the European Commission has proposed that eventual bank resolutions should be conducted centrally, by an authority under its own Brussels roof, with money coming from all over the Eurozone (Single Resolution Mechanism-SRM)”.

Despite strong reaction from Germany, Barroso continued yesterday to advocate for a central bank resolution mechanism, with funding from all over Eurozone. In this way the European Banking Union will mutualise a part of national risks and lead to a new and much closer Union. He said “Now it is urgent to put the second leg in place by agreeing the single resolution mechanism and fund and the single rule book for bank resolution tools and deposit guarantees”.

This time, he added the national bank deposit guarantee schemes, and, in a way mutualising them too. With this statement he advances his proposal for a central bank resolution mechanism, up to the point of a common bank guarantee scheme for the entire Eurozone. He obviously thinks that there is no other way to defragment Eurozone’s financial markets and offer to all SMEs the same credit conditions for the same business risks.

Barnier’s statement was almost along the same lines. He said “A banking union also requires action to restructure non-viable banks when necessary. That is why the supervisory system needs to be complemented by an integrated European resolution system for all countries participating in the banking union…We must find a final agreement on the Directive on Banking Resolution for Member States and political agreement in Council on the Single Resolution Mechanism by the end of year.”

The core phrase in Barnier’s position is “integrated European resolution system for all countries participating in the banking union”. Obviously, he means that the bank resolution and restructuring should be conducted by one system, possibly sited in Brussels under Commission’s roof.

All in all, there is no doubt that Eurozone needs an agreement on the bank resolution mechanism before the end of the year. In reality, this was most probably the focus of discussions in both the Eurogroup on Monday and in the Ecofin yesterday.

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