EU Parliament and Council: Close to agreement on the bank resolution mechanism

European Parliament Plenary session in Strasbourg on the ‘Single Resolution Mechanism and the Single Bank Resolution Fund’. MEP Pervenche Beres (S&D, FR) has the floor, in a not so plenary meeting of 04/02/2014 (EP Audiovisual Services).

During this past week the European Parliament had been working hard on its position over the bank resolution mechanism (the last building block to complete the Banking Union), in the context of the ongoing negotiations between the legislative and the Greek Presidency of the Council. In two consecutive plenaries the MEPs approved resolutions making a compromise with Germany and France more plausible. The key phrase was that “taxpayers should not be first in line to pay, when banks ran into trouble”. The noble cause is to enact the grandiose project of the Banking Union before the May European Election. The fact that on Thursday 6 February the Parliament negotiators had their original mandate confirmed by 441 votes to 141, with 17 abstentions, means that almost all the political groups of the house back the negotiating position of the team under MEP Elisa Ferreira (S&D, PT). This said, it will be very difficult for the Council to overrun the main points of the Parliaments’ positions.

At this point it has to be reminded that the legislative has rejected the idea of institutionalising an Intergovernmental Conference, made up by government representatives, who will decide almost on everything for a bank resolution, from authorizing to the coverage of the cost. Berlin and Paris insist that for the next five years those costs will be covered exclusively by the member state where the bank is based (including the taxpayers), and only in the tenth year of the Banking Union’s life this cost could be shared by all participating countries. Clearly, the governments of Germany and France, while reigning politically in the Council, would have the prerogative on all those decisions. This Intergovernmental Conference is a simple international agreement having no relation whatsoever with the European Union functions. Exactly for not being an EU institution, this Intergovernmental Conference couldn’t oblige the rich countries to share the bank resolution cost with the poor.

Taxpayers tapped

However, this key phrase referred to above, that the Parliament’s negotiating team promoted last week, means that if taxpayers should not be first in line to pay for the cost of a bank resolution, they can at least contribute to it as second or third providers. This clearly opens a new possibility for a compromise between the Parliament, the Council and the Commission, to the extent of the powers of this Intergovernmental Conference and Agreement.

To speed up the negotiations and repel the accusation of delaying the whole process, the Parliament last week threw the ball to the Council’s court. To this effect, last Thursday, EP President Martin Schulz said that upon request of the political groups, he would send a request to Council for an extraordinary ECOFIN meeting to be convened earlier than the one scheduled for the 17th February, so as to avoid a two-week delay to the negotiations. In this way the Parliament paves the way for a timely and acceptable by all political parties agreement.

Still the key position remains that taxpayers should not be first in line to pay, when banks run into trouble. The truth is that the Council has never asserted that taxpayers should be the first to pay for the cost of a bank resolution or recapitalization. Actually, during the ECOFIN Council of 15 November last year, the 28 EU ministers of Finance accepted that, in case a bank is either to be recapitalized or resolved, the burden will weigh first on the unsecured lenders and depositors of the bank (after appropriate bail-in). Of course, this is provided by the already in force Bank Recovery and Resolution Directive (BRRD) which also ensures that all banking institutions hold sufficient amount of own funds and bail-inable liabilities. In conclusion, what the Parliament sets as its main request is already met. Taxpayers won’t be the first to pay for the cost of recapitalizing or winding down a bank, they will simply be the second and the third parties to be tapped for this reason.

Closer to ECOFIN’s position

In relation to what was decided during last November’s ECOFIN Council, the European Sting had published a very clear and brief appraisal. In the core of it this writer on November 18 last year concluded, “In brief, if a bank is either to be recapitalised or resolved, at the end of the day the burden will weigh on the unsecured lenders and depositors of the bank (after appropriate bail-in), secondly on the country’s taxpayers (provision of national backstops) and thirdly on Eurozone taxpayers (the ESM)”. In short, this is tantamount with the prospect of Eurozone taxpayers being the unwilling guarantors of last resort for the entire banking system. And by God, this system has a combined balance sheet of €42 trillion, that is the more than the triple of the total income of all citizens. Again God help us with what lies hidden in those accounts.

Despite all that, the Parliament seems to be stuck in its demand that taxpayers should not the first to be tapped. A Press release issued by the Parliament on 6 February states, “the (Parliament) negotiators, led by Elisa Ferreira (S&D, PT) have insisted that the member states’ (ECOFIN Council) position has significant drawbacks which endanger the system’s core objective – that of ensuring that the taxpayer is not first in line to bail out for banks that run into trouble. The principal drawbacks are an overly complex and politicised decision-making process for winding up banks, and a bank-financed fund which MEPs say would struggle to be credible in the first years of its life”.

Negotiating what?

Having in mind that there won’t be any negotiation about the target of the whole system, because everybody hypocritically agrees that taxpayers shouldn’t be the first to be tapped, understandably the Parliament negotiators will focus on complexity and the politicization of the whole procedure. But on both those accounts, there are many levels of complexity and political interference that the Greek Council Presidency could negotiate, being of course in touch with France and Germany. That’s why the negotiations may be closer to an agreement than what many think.