The Parliament paves the way for the creation of the European Banking Union

European Parliament. ECON Committee meeting – Debate with National Parliaments. In the foreground Elisa Ferreira (S&D, PT), ECON Rapporteur on the rules dealing with struggling banks. (EP Audiovisual Services).

Today, 18 October, is the last day for MEPs to table their amendments with the Parliament’s Economic and Monetary Committee, in the process of formulating the legislature’s proposal for an EU mechanism to sort out troubled banks. This is the much debated bank resolution and recovery mechanism and fund. The Committee vote is planned for 25 November. After that, the lead MEPs will enter into negotiations with the Council to conclude a final deal.

The European Parliament has by now come very close to formulating a complete proposal on the bank resolution and recovery mechanism and fund, which is expected to eke out the creation of the European Banking Union. According to the Parliament’s proposal, as it has been formulated so far, the key features of this mechanism will be a single resolution authority based in Brussels under the roof of the Commission, and a resolution fund able to borrow from an EU loan financial facility (obviously the ESM plus other sources) until it becomes self-financed. The parliament also introduces a strong risk element in calculating banks’ contributions to the resolution fund. Risky players will pay more. Let’s see the details of the Parliament’s proposal.

The Parliament deal

According to a Press release issued by the Committee, its Rapporteur on the rules dealing with struggling banks Elisa Ferreira (S&D, PT) backed the key elements of the Commission‘s proposal including “placing the EU executive at the heart of the system”. She nonetheless tabled amendments requiring a financial safety net until the EU bank crisis fund is fully funded, strengthening depositor protection, and clarifying responsibilities at each stage of dealing with a failing bank. The amendments also step up European Parliament oversight.

The new feature in Ferreira’s proposal is that she upholds the distribution of responsibilities and of course of the financial burden resulting from a bank resolution or reshuffling, among the players involved. This is close to what the President of the European Central Bank, Mario Draghi, has proposed for the early resolutions, which might prove necessary to be conducted, before the resolution fund is fully operational.

Ferreira commented that “In its infancy, the proposed resolution fund, which is to finance the winding down or propping up of troubled banks, will be credible only if it has backstop funds to tap into”. This was exactly what Draghi has said not only in relation with the possible resolution or recovery of a bank, but also in order to make credible the forthcoming bank crash test. At this point it must be reminded that the other pillar of the Banking Union, the Single Supervision Mechanism, is ready and will assume its task as of November 2014, being institutionalised under the roof of the ECB.

Credible crash tests

The central bank has already started hiring people for this new and completely independent department. However, before this service engages in its regular supervision activities in a year from now, the ECB will run an extensive audit on the assets of the around 200 Eurozone banks, that it is supposed to directly supervise. Those crash tests will be conducted some time next spring and the ECB has hired a private auditing firm to assist in this task. The relevant broad principles of those tests will be soon made public by the ECB.

In order for those tests to be credible though, Draghi says that a fully operational bank resolution and recovery option must be in place. Obviously, it will be meaningless to conduct far-reaching bank crash test and not being able to deal with problems which may arise from this audit.

Returning to the other pillar of the Banking union, the resolution mechanism has already acquired the possibility to recapitalise banks. This is needed to face up to early problems before the resolution and recapitalisation fund is fully operational. To clarify things on this issue, Jeroen Dijsselbloem, the President of Eurogroup, answered a journalist’s relevant question while entering the Ecofin meeting in Luxembourg on 15 October. He stressed that “Last June we reached an agreement on the main elements of direct recapitalisation from the ESM (the wealth European Stability Mechanism), as part of Single Supervision Mechanism regulation. In special circumstances the ECB can start its supervisory work earlier on particular institutions. In that case direct recap could be possible”.

All in all, if the Parliament and the Council, including Germany, agree to a deal before 25 November, the Parliament could endorse it then. In that case all the basic elements of the European Banking Union will be there; the Single Supervision Mechanism under the ECB and the Single Resolution Mechanism under the Commission. As for the Single Resolution Fund, it will be able to borrow from an EU loan facility, comprising the ESM and the implicated parties including the member states.