Resolving banks with depositors’ money?

Press conference by Michel Barnier, Member of the European Commission, on the establishment of a Single Resolution Mechanism for the Banking Union. (EC Audiovisual Services).

Press conference by Michel Barnier, Member of the European Commission, on the establishment of a Single Resolution Mechanism for the Banking Union. (EC Audiovisual Services).

Tomorrow’s Ecofin council, marking the last 2013 meeting of the 28 EU ministers of Finance, constitutes the final opportunity of the member states to strike an agreement in order to finalise the construction of the European Banking Union. What is still missing for the establishment of the EBU is of course the full Single Resolution Mechanism, which will accompany the Single Supervisory Mechanism in the smooth functioning of EBU. It’s imperative that the bank supervision activity is flanked by an effective resolution mechanism otherwise the stress tests on banks will be meaningless.

The supervision authorities, namely the European Central Bank and the national central banks must know in advance what will happen to the financial firms if they don’t pass the viability tests; how they are going to be recovered or resolved. Last June, the 28 EU leaders mandated the Ecofin council to reach an agreement on those matters before the end of the year, given that early in 2014 the ECB is expected to start its stress tests on banks and other financial firms.

Bank recovery and resolution

Despite the fact that the Single Supervision Mechanism is already in place under the roof of ECB, the second pillar of the banking union, that is the Single Resolution Mechanism, is always in the air. The key features of the SRM which are pending and have to be decided during tomorrow’s Ecofin are the authority under which it will function and the financial means it will use, in the recovery or the resolution of those banks which are singled out by the SSM as non-viable.

In the first question there are two possible answers. The authority under which the SRM is going to function can either be the European Commission or the Ecofin itself. In any case, the SRM will function centrally for the 130 ‘systemic’ Eurozone banks, while the recovery and the resolution of the smaller financial firms will be realised by the member states in a decentralised manner. As for the authority issue, it is much more probable that it will be the Commission rather than the Ecofin, on account of flexibility. On top of that, the Commission has a much more competent and adequate in numbers personnel to secure this function.

The key is who pays for the failing banks

No matter under who’s authority, recoveries and resolutions will be realised under the rules foreseen in the Bank Recovery and Resolution Directive, which has been voted for and will be in force at the beginning of next year. It provides for the pecking order of funds to be used for the recovery or the resolution of a non-viable bank. Those funds will be the bank’s own capital and if this is not enough it will be its unsecured obligations (uncovered bonds and deposits above the limit of €100,000) to be used in the bail-in.

The problem is what will happen if those funds are still not enough. The discussion so far on this question has focused on the need for a Bank Resolution Fund. The Fund will supposedly support the resolution mechanism and will be financed by a levy on all banks. Until it is fully capitalised it has to be able to borrow from the European Stability Mechanism, which has a dowry of about €500 billion paid by the European taxpayers. Theoretically, the Resolution Fund will return the money to the ESM after it has been fully capitalised.

However, the implication of ESM’s public money has been strongly contested by Germany, on the grounds that no taxpayers’ money should be used to resolve or bail out banks. Then a new idea appeared; the use of the deposit guarantee systems operating in various EU member states. Danièle Nouy, the ECB’s nominee for the new post of EU bank supervisor, while speaking at the EU Parliamentary hearing to approve of her nomination, said that “the EU supervisor would be hampered if the two other pillars of banking union (recovery and resolution mechanism and deposit guarantee system) were not set up”.

Pay depositors with their own money!

The use of the deposit guarantee systems of member states in possible bank resolutions was confirmed this morning with a Press release issued by the Lithuanian Presidency of the Council. It goes like this “The Ministers (of the Ecofin) will also consider key open issues on Bank Recovery and Resolution as well as Deposit Guarantee Schemes Directives to provide Presidency with a final mandate to conclude the negotiations with the European Parliament. Bank Recovery and Resolution Directive is to establish a framework for the recovery and resolution of banks and investment companies while safeguarding the taxpayers’ money. The aim of the revised Deposit Guarantee Schemes Directive is to ensure fast pay-outs to depositors and that each member state would have sufficient funds in the scheme”.

At this point it has to be reminded that the European Parliament has asked that no deposit guarantee scheme money will be used to bail out failing banks. This must change now and to this effect the Presidency is to ask for Ecofin’s mandate to renegotiate with the Parliament. It’s highly probable that the Parliament will agree not only on the reimbursement of the secured deposits of up to €100,000, by the deposit guarantee schemes. Since this is more than obvious, the Presidency is expected to ask the Parliament to agree that the deposit guarantee schemes ‘participate’ in the entire bail-out procedure.

As things stand now and given the depth and the length of the discussions so far and the urgency of the entire affair, it is very probable that tomorrow the Ecofin will decide on both those pending issues, namely the resolution authority and the funding. The question remains though, what will happen and who is going to pay for bank resolutions, if the entire capital of the deposit guarantee schemes will not be enough and up to which extend these funds will be used. Most probably everything will end up at paying depositors with their own money.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the sting Milestone

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

Why is Grexit again in the news? Who is to pay for Eurozone’s banking problems?

Bankruptcy or referendum: which one is going to be first?

Cambodia: Giving back to UN peacekeeping

We’ll succeed together

From Grexit to Brexit: UK industry now says the in/out referendum is good for your health

Bundesbank’s President Weidmann criticises France and the EU. Credibility at risk?

Why we need a Paris Agreement for nature

More than 80% of adolescents worldwide aren’t getting enough exercise

What keeps me up at night? Two strategists reply

UN monitoring team in Yemen verifies pullout of armed forces from crucial port zones

Commission refers Denmark to the Court for failing to fulfil its obligations in relation to the name “Feta”

Finland is a world leader in clean energy. Here’s what’s driving its success

The European Parliament declares climate emergency

Four ways innovation can help to beat heart disease

New UN Syria envoy pledges to work ‘impartially and diligently’ towards peace

Bosnia and Herzegovina: MEPs concerned by slow progress in EU-related reforms

Mali not fulfilling its ‘sovereign role’ in protecting its people: UN human rights expert

EU Parliament approves CETA: the EU-Canada free trade deal sees the light in Trump’s gloomy era

Now is the time to seize ‘unprecedented opportunity’ of the Sustainable Development Forum, says ECOSOC President

EU elections 2019: Rise of nationalist trends and populism in Europe challenges the EU edifice

Yemen: Major UN aid boost for ‘up to 14 million’ as country risks becoming a land of ‘living ghosts’

Inequality in the delivery of health services

4 essential qualities for digital leaders

Sustainable investment is on the rise – here’s how to connect the dots

UN chief hopes for new agreement after Israel concludes international observation mission

World Food Programme accesses Yemeni frontline district for first time since conflict began

European Commissioner for Youth wants young people to be at heart of policy making

Junker for Commission President: What were the stakes in this affair

New York City has a plan to fight fast fashion waste. Here’s how it works

We must help developing countries escape commodity dependence

Preserving biodiversity vital to reverse tide of climate change, UN stresses on International Day

These countries have the highest minimum wages

China dazzles the world with her Silk Road plan to connect, Asia, Europe and Africa

Madrid is banning high-polluting vehicles from the city centre

UN Afghan Mission ‘outraged’ by deadly Taliban attack in Kabul, as hardline group threatens election violence

Conflicts and extreme climate change threatens access to food in 39 countries – UN agriculture report

‘Foreign children’ in overwhelmed Syrian camp need urgent international help, says top UN official

Here are what UNESCO considers to be remarkable new World Heritage Sites

Food safety: more transparency, better risk prevention

‘Eden bonds’: how rewilding could save the climate and your pension

MWC 2016 LIVE: BlackBerry acquires Encription, talks Microsoft and health

UN agencies ramp up Somalia measles and polio campaign

UN chief sends condolences to families of Malawi flood victims

Costa Coffee products (Copyright: Costa Coffee; Source: Costa Coffee website, Press area)

The start of the “Caffeine rush”: Coca-Cola acquires Costa Coffee days after Nestlé-Starbucks deal

UN chief condemns deadly attacks in Afghanistan

Central African Republic: Guterres says UN mission committed to protecting civilians, helping stabilize country, as violence flares

Migration: Commission steps up emergency assistance to Spain and Greece

‘Continuing deterioration’ leaves Mali facing critical security level: UN expert

UN General Assembly President defends ‘landmark’ migration compact

Impossible Brexit options: WTO or new referendum?

Generalist practicing: is it worth it?

93 million children with disabilities ‘among the most likely to be left behind’: UN rights chief

The EU’s trading partners: US, China and the rest

Robots aren’t stealing all our jobs, says the World Bank’s chief economist

Measles ‘misinformation campaigns’ through social media, fuel rising toll

What the Women’s World Cup can teach us about capitalism

UN Human Rights Council resolution on youth and human rights: a step forward for youth rights

EU Youth Report casts stark light on life for young Europeans

Tech companies are changing, for the better

Statement by Cecilia Malmström, Member of the EC in charge of Trade, on the successful conclusion of the final discussions on the EU-Japan Economic Partnership Agreement (EPA) – Brussels, 08 Dec 2017. (Copyright: European Union; Source: EC - Audiovisual Service; Photo: Georges Boulougouris)

The EU and Japan seal free trade pact that will cover 30% of global GDP

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