Eurozone close to agreeing on a Banking Union

ECOFIN Council. Michel Barnier, Member of the European Commission, Vitor Constancio, Vice-President of the European Central Bank, (from left to right). The central banker may look timid before the French showman but he clarified that the ECB needs clear-cut procedures. (Council of the European Union, 18/12/2013).

ECOFIN Council. Michel Barnier, Member of the European Commission and Vitor Constancio, Vice-President of the European Central Bank, (from left to right) shake hands. The central banker may look timid before the French showman but he clarified that the ECB needs clear-cut procedures. (Council of the European Union, 18/12/2013).

In the small hours of yesterday night, the ECOFIN Council agreed on a general approach over the single resolution board (SRB) and a single fund for the resolution of banks in Eurozone. These are the main tools of the Single Resolution Mechanism (SRM), which constitutes the second pillar of the grandiose European Banking Union project. The agreement reached at the ECOFIN, largely follows the German proposal and doesn’t diverge much from the position the European Parliament adopted on Tuesday.

If the ECOFIN compromise is approved today by the 28 EU leaders, during their year-end European Council, then negotiations will start between legislators and the Greek presidency of the Council as from 1st January. The target is that negotiations between the Council, as represented by the Presidency, and the European Parliament are concluded on time and an agreement is reached over this regulation on the SRM at first reading, before the end of the Parliament’s current legislature (May 2014).

The ECOFIN compromise

The compromise reached yesterday by the ECOFIN Council contains the following basic elements:

*Member states are committed to conclude an intergovernmental agreement by 1 March on the functioning of the single resolution fund and come up with a draft regulation on the single resolution mechanism.

*This intergovernmental agreement would include arrangements for the transfer of national contributions to the fund and their progressive mutualisation over a ten-year transitional phase. It would endorse the bail-in rules established in the bank recovery and resolution directive as applicable to the use of the single fund.

*The single resolution fund would be financed by bank levies raised at national level. It would initially consist of national compartments that would be gradually merged over ten years. During this ten-year period, mutualisation between national compartments would progressively increase. So, while during the first year the cost of resolving banks (after bail-in) would mainly come from the compartments of the member states where the banks are located, the share would gradually decrease as the contribution from other countries’ compartments increases.

The Eurogroup and ECOFIN ministers also adopted a statement on the design of a backstop to the single resolution fund. The statement specifies that during the initial build-up phase of the fund, bridge financing will be available from national sources, backed by bank levies, or from the European Stability Mechanism (ESM), according to existing procedures.

This funding process of bank resolutions and recoveries may look tortuous, but the reference to the ESM clarifies that during the transitional period there would be a reliable backstop. However, there seems to be a problem in the decision-making procedure to conclude that a bank will be resolved. The implication of three bodies in this procedure (Resolution Board, Commission and Council) could be ineffective and time-consuming. The ECB insists that this decision has to be agreed upon in 24 hours, within a weekend. This is probably the weakest point of the compromise reached yesterday by the member states. The Parliament will attack it for sure.

The Parliament’s position

However, the Parliament‘s position doesn’t differ greatly from the compromise reached yesterday at the ECOFIN. The proposal of the legislators has the following main characteristics:

*The supervisor (European Central Bank) would be the sole body empowered to propose initiating a resolution. The Resolution Board composed of national resolution authority representatives and others, would then evaluate this proposal and suggest that the Commission initiate such action. The Commission would then take the official decision to initiate a resolution and the Board would decide on the details for its execution.

*Within 10 years a European Fund, fed by bank contributions and representing 1% of covered deposits, should be up and running… Until the Fund reaches its target level, it could be financed by loans from a “European public instrument”, MEPs suggest. This would include, for example, loans from the European Stability Mechanism or the EU budget.

Common points

The two approaches coincide in the following crucial points:

*The ECB will single out which bank is about to fail and would recommend its resolution to the Bank Resolution Board.

*The Bank Resolution Board comprising the member states and some others will give the final accord for the resolution, in coordination with the Commission and the Council. Upon this issue the Parliament longs for a clear-cut decision-making procedure, supporting the position of the ECB. A decision has to be produced within 24 hours.

*There will be a Resolution Fund, initially divided in national branches. The Fund will be capitalised in 10 years, through a levy on all banks. In the transition period if the Fund needs extra money, it will borrow from national sources and the ESM. At the end of the 10 year period all the national branches of the Fund will merge in one.

There is no question that Germany had it its own way. For at least the next four years member states will be responsible for the resolution and the recovery of banks in their territory. A truly common liability, resembling to a Eurobond, will start emerging after the fourth year that is towards 2020. The SRM would enter into force on 1 January 2015. According to yesterday’s decision in the ECOFIN bail-in and resolution functions would apply from 1 January 2016. The SRM regulation wouldn’t apply before the intergovernmental agreement enters into force.

 

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