A new proposal breaks the stalemate over the Banking Union

From left to right: Olli Rehn, Vice President of the European Commission, Yiannis Stournaras, Greek Minister for Finance, Michel Barnier, Member of the European Commission. Press conference after the ECOFIN Council of 28/1/2014. (The Council of the European Union photographic library).

According to the European Commissioner Michel Barnier, the Eurozone member states, who participate in the Eurogoup and the ECOFIN councils are ready to soften their position in the negotiations with the European Parliament, to lift the deadlock over the creation of the Banking Union. This is a step forward in resolving the stalemate around the coverage of the cost of winding down or recapitalising failing banks and thus complete on time the enactment the European Banking Union. This is by far the most important project the European Union is about to accomplish, after the introduction of the common currency.

Barnier said that while participated together with his colleague Ollie Rehn and the Greek Minister of Finance Yiannis Stournaras, in the Press conference after yesterday’s key ECOFIN Council meeting. Greece holds the rotating Presidency of the Council for the first six months of this year. Stournaras is now mandated to open negotiations with the Parliament.

A conciliative ECOFIN

This change of stance and the adoption of a conciliative attitude by the ECOFIN Council vis-à-vis the European Parliament comes after a proposal by Benoît Cœuré, Member of the Executive Board of the European Central Bank. Last week he suggested cutting down from ten to five years the period needed to fully mutualise the responsibilities between the Eurozone member states, in relation to the coverage of the cost of winding down a failing bank. Even Wolfgang Schäuble, the German Minister of Finance and the main proponent of the ten year option, didn’t reject the five year proposal and commented that in order to achieve that, the banks have to speed up the process to fully capitalise a €55 billion bank rescue and resolution fund.

In this way, yesterday’s ECOFIN Council actually opened a new round of negotiations with the European Parliament. The legislators have almost unanimously rejected the 18 December decision of the ministers of Finance. All the major political groups of the Parliament have informed the ECOFIN Council in writing, that the House would remain adamant in support of a European Banking Union of equality, transparency and political impartiality.

The ECOFIN Council during its 18 December meeting decided that the cost of winding down a Eurozone bank will be covered almost exclusively by resources of the member state, where the bank is based. This arrangement will be in force for at least the first four to five years, after the Banking Union starts its operations. Then gradually the cost of winding down a bank will be progressively shared by all member states and only in the tenth year the national resolution funds will merge into one.

2025 is too far away

On the insistence of Germany, at that meeting the ECOFIN also decided that all this will be arranged through an Intergovernmental Conference and Agreement, which will set the rules for the Resolution Fund for failing banks. This Intergovernmental option is a procedure completely outside the EU standards and actually it’s the equivalent of a common international agreement between a number of countries.

Last Monday the European Sting writer Dennis Kefalakos wrote “The idea behind this Intergovernmental Conference – being convened in order to decide the details of the Resolution Fund for Eurozone’s failing banks – is that Germany doesn’t accept a uniform winding down procedure for all banks. The Resolution Fund is the key instrument in the whole affair of the Banking Union. It will also define the scope and the functioning of the Resolution Mechanism and the thereupon, the effectiveness and the credibility of the entire European Banking Union”.

Change of attitude

In this line of thinking, the ECOFIN Council so far insisted that the Resolution Funds will remain a national affair for the next five years and only after the sixth year will they start to merge. The full merger of the national Resolution Funds into one, covering the entire Eurozone will be achieved after ten years sometime in 2025. Berlin’s target is that during the next five years every country will be responsible for its own banks. In view of all that, the European Parliament remains adamant and almost unanimous in its position not to accept the Intergovernmental, because, among other things, it sidesteps completely the legislative and the Commission.

Now, Benoît Cœuré proposes to cut down from ten to five years the period needed to fully mutualise between the euro area member states the responsibilities, which may arise from a failing bank. Correspondingly, the ‘every country for itself’ period will be cut down to two and a half years. This is a time interval that could be discussed between the Parliament, the Council and the Commission. The problem is that the banks will have to create this resolution and recapitalisation fund of €55bn five years earlier.

The ECB breaks the stalemate

However, Cœuré wouldn’t have proposed this shortening of the adjustment period, if he didn’t have indications about the ability of Eurozone’s 6,000 banks to manage that. Not to forget that the ECB is currently assessing the balance sheets of the 130 largest Eurozone banks which account for 85% of the entire banking system of the euro area. Despite the fact that those banks probably need badly more capital for themselves, their obligation to create this resolution and rescue fund for their own flock is a higher priority for the entire system than the capitalisation of each bank individually.

All in all some billions won’t block the ability of Eurozone to create a well functioning and credible Banking Union.