CDU-SPD agree the terms for EU’s Banking Union

Wolfgang Schäuble, German Minister of Finance on the right, and José Manuel Barroso European Commission President, participating in the Brussels Economic Forum. (EC Audiovisual Services).

Wolfgang Schäuble, German Minister of Finance on the right, and José Manuel Barroso European Commission President, participating in the Brussels Economic Forum. Notice the Teutonic gaze. (EC Audiovisual Services).

With the talks on the formation of a coalition government, involving Angela Merkel’s CDU and the German socialists of SPD having progressed as far as to cover the issue of Eurozone’s bank resolution mechanism, it seems that the main elements of an agreement over the completion of the European Banking Union are now in place. According to the interim Federal Minister of Finance Wolfgang Schaeuble, who spoke yesterday to Der Tagesspiegel, the two biggest parties which are about to form the new German government agreed that, “ the future resolutions of Eurozone banks cannot be realised on taxpayers’ money, even less on the European Stability Mechanism’s (ESM) funds”. This said the new German government would be bound by this agreement, whoever the next Federal Minister of Finance will be.

On the same issue Michel Barnier, European Commissioner responsible for internal market and services said last Friday, that the EU’s executive arm is open to negotiations on all the pending topics, hindering the enactment of the Single resolution Mechanism (SRM) for Eurozone’s failing banks. Barnier, speaking at the European Savings and Retail Banking Group conference last week in Brussels, clarified that those issues cover the entire structure of SRM, including the role of the Commission, the necessity of a Single Resolution Fund, the transitory measures before the Fund is ready and the field of application (if the central SRM will cover all the 6000 Eurozone banks or the 130 ‘systemic’ ones only).

However Barnier noticed that it’s not open for negotiation, that the European Banking Union should be ready before the European election of May 2014. He stressed that this deadline was set by the 28 EU leaders during their June 2013 Summit in Brussels and added that this is the largest project undertaken by the EU, after the introduction of the common currency.

Supervision plus resolution

At this point it must be reminded, that the other pillar of the European Banking Union, namely the Single Supervision Mechanism (SSM) was fully institutionalised last month, under the roof of the European Central Bank. Unfortunately the SRM still remains in the air.

On 13 October the European Sting writer Suzan A. Kane wrote, “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 Fund) able to borrow from the ESM”.

Unfortunately, negotiations for the resolution mechanism froze after the German elections of 22 September, for obvious reasons. The first indication on what the new German government would propose on the structure of the SRM, came just yesterday from Schaeuble. His statement mentioned above is of general character though. The immunisation of taxpayers from the cost of bank resolutions is confirmed, at least partially by the Bank recovery and resolution Directive. According to it, the money to cover the resolution cost will come from the banks’ creditors and unsecured depositors (above the €100,000 benchmark). The problem is that it may not be enough. In this case the need for a resolution fund is obvious, if taxpayers are to stay really immune.

The resolution fund

In view of that the Commission also proposes that the resolution Fund would be capitalised by the banks themselves, through a levy. Until the day the Fund will be fully operational though, it should be able to borrow from the wealthy ESM, which is currently endowed with €500 billion from Eurozone’s taxpayers. The next question which naturally arises is, if Germany would accept that?

To sweeten that, Mario Draghi the President of the European Central Bank tried to bridge the gap by proposing an intermediate solution. While addressing the European Parliament on 23 September, he said that “until the resolution fund is fully financed (by the banking industry), it should be able to borrow from other sources, including national ones, to ensure that properly funded resolution is an option from the start”. Draghi didn’t explain which will be those “national sources”. It is obvious though that it will be sources from the country where the bank in question conducts its main business.

Now it remains to be seen, if the new German government will consider that the resolution fund’s borrowing from ESM, will burden the taxpayers. If not, then the road to the Banking Union will be wide open.

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