The Eurogroup+ is born to govern the EU Banking Union

Andris Vilks, Latvian Minister for Finance, Jeroen Dijsselbloem, President of the Eurogroup, Klaus Regling, Chief Executive Officer of the European Financial Stability Facility and Managing Director of the European Stability Mechanism (from left to right). (The Council of the European Union audiovisual services, 17/2/2014).

The importance of the Single Resolution Fund, which is supposed to bear the cost of Eurozone’s failing banks, was underlined yesterday evening by the fact that the President of Eurogroup, Jeroen Dijsselbloem, the Dutch minister of Finance, baptized the group of people who will govern the function of the SRF as Eurogroup+. The Eurogroup is made up by the 18 ministers of Finance of the euro area member states.

Obviously the Eurogroup+ will be made up by the ministers of Finance of the countries which will participate in the European Banking Union that is the 18 euro area member states, plus the willing of the other ten EU countries. The ‘baptism’ took place yesterday during the Press conference which followed the regular Eurogproup and was conducted jointly by Dijsselbloem and the competent Commissioner Ollie Rehn. Today all that and some more issues will be discussed in the regular ECOFIN Council of the 28 EU ministers of Finance.

This statement comes in relation to the ongoing discussion with the European Parliament about the nature and the functioning of the Single Resolution Mechanism and Fund which are to take care of Eurozone’s failing banks. And there will be such banks, if Danièle Nouy Chair of the Supervisory Board of the Banking Supervision section of the European Central Bank, is to be taken seriously when she said that “if a bank has to go it will go”.

ECB does just the audit

Not to forget that the ECB has commenced a comprehensive assessment of the 130 largest euro area banks, involving asset quality reviews and the stress tests. Last week the Governing Council of the European Central Bank issued the decision ECB/2014/3, which identifies the credit institutions that are subject to this comprehensive assessment. Some days earlier the ECB had published the criteria and the methodology to be followed in the asset quality review, and confirmed the stress test parameters for the comprehensive assessment.

In the same line, the European Banking Authority announced that the capital thresholds for the baseline and adverse scenarios will be 8% and 5.5% Common Equity Tier 1 capital respectively. This means many banks of the 130 will need a lot more capital and very probably some of them may prove beyond limit of repair. At this point the work of the ECB as supervisor stops and commences the competence of the Single Resolution Mechanism and Fund.

Negotiating with the MEPs

Of course, winding down a bank out of those 130 is not a simple task at all. The first problem to be accounted for is what repercussions will arise from possible contagion effects to other institutions. Then, the relations of the country’s exchequer with the institution in question will be examined, plus a lot many other issues. Given the ability of even a medium-sized bank to hide incredible risks, to say the least, in its balance and off balance sheet accounts, it is impossible to predict the nature of the risks the ECB may find while exercising its supervisory role. That’s also why the Eurogroup wants to retain, through this Eurogroup+ body, the final decision to wind down a bank.

While the European Union decision-making and legislative bodies are currently shaping the Single Resolution Mechanism for failing banks, the Eurogroup alone is discussing the operational framework of the future European Stability Mechanism’s direct recap instrument. Yesterday afternoon Dijsselbloem said “We have made progress towards resolving the last outstanding issues and I am confident that we will come to a political agreement in time for our meeting in March”. Actually, he repeated what he had said in Davos, “That instrument we will finalize in March, so that will also be available on strict conditions on the outcome of the asset-quality review” conducted by the ECB.

All is a Eurogroup

Coming back to the Eurogroup+ meeting which followed the regular Eurogroup late yesterday evening, Dijsselbloem explained that after the Press conference “I will chair a ministerial meeting on the intergovernmental agreement on the functioning of the Single Resolution Fund, the so-called Eurogroup+…Negotiations are still ongoing at technical level so I don’t expect an agreement tonight, but I hope that…the negotiations on this agreement are concluded in March together with the trilogues ( ECOFIN, Parliament, Commission) on the SRM Regulation”. The agreement he refers to is currently under negotiations with the European Parliament.

European Sting readers have been informed about the intentions of the ECOFIN as they were formulated in the meeting of 18 December 2013. Central role in this respect is being reserved to this Intergovernmental Conference and Agreement which will decide almost on everything, a possibility rejected by the Parliament. The ECOFIN wants the cost of winding down a bank to be covered by the country in which the lender is based (many national Resolution Funds) and only in ten years this cost to be progressively shared or mutualized between all member states (merger of national Funds in one at the 10th year)). Mario Draghi proposed to cut down this period to five from ten years.

Negotiations around all those things were conducted until very late last night in the presence of representatives from the Parliament. The Single Resolution Mechanism is to consume most of the time of today’s ECOFIN Council and in it will be the single discussion issue after 12.15 H.