Parliament: Last compromise on bank single resolution mechanism

European Parliament. Plenary session, week 6, 2014 – Discussion on the Single Resolution Mechanism and a Single Bank Resolution Fund. Evangelos Venizelos, Deputy Prime Minister and Minister of Foreign Affairs of Greece, has the floor. Greece holds the rotating Council Presidency during the first half of this year. (EP Audiovisual Services, 04/02/2014).

Undeniably, the European Banking Union’s prime target is to definitely cut the umbilical cord between banks and sovereigns, through the creation of a uniform supervision and insolvency dealing environment for all Eurozone lenders. Yet, Germany and France insist that the final decision for the resolution of a failing bank must be taken by member state governments. In view of that, the European Parliament, while being a political institution par excellence, insists that governments and politicians should not have a say or at least not the final word in the procedure to take the difficult decision to resolve or recapitalize a bank.

From a legal point of view, as things stand now, the European Central Bank, being the supervisor of Eurozone’s banking industry, can singlehanded decide if a bank has or is close to fail. Then the supervisor delivers the lender to the next stage, where the Bank Recovery and Resolution Directive prescribes the exact procedure and the use of resources in resolving or recapitalizing a bank (bail-in). There is really not much to discuss, except on the creation of solid backstop in case the bail-in funds are not enough to complete the recovery or the resolution. Still, Germany and France insist that decisions, including the resolution and the use of funds, should be placed under the authority of governments, through the time consuming and hazy procedures of the Council.

No more grey zones

This is a clear attempt to continue nurturing the gray dealings between governments and banks. Up to now the major commercial banks, practically in all member states, have indirectly or directly supported government policies by intervening in national sovereign bond markets. All that led to the 2010 financial crisis, where the major Eurozone banks had imprudently lent to sovereigns hundreds of billions.

Now, after the ECB has been definitively mandated with the task to supervise all Eurozone banks, and the Bank Recovery and Resolution Directive being in force, what is left is only to institutionalize the single resolution mechanism and fund. Exactly at this point the European Parliament rejects the invilvement of the Council in all the crucial steps in deciding and funding the resolution of a lender. Given that these procedures have to be institutionalize within this legislature, before the May elections, the Parliament has offered to Council a series of compromises.

Compromise or lose everything

However the ECOFIN council has made only minor concessions and yesterday the Parliament stated that, “We continue working constructively with the Greek Presidency and foresee that we are close to finding compromises on many technical aspects of the regulation. On the essential issues however, namely the decision-making processes and the single resolution fund, we remain far apart. The Presidency has been deprived of sufficient room to make more than cosmetic changes and, although we are ready to factor in some concerns raised by member states, we cannot sign off on a deal which establishes a mechanism which is unfit for purpose. The ECB, the Commission and many economists have raised these concerns too. A potentially unworkable resolution system will jeopardise banking union and leave taxpayers exposed”.

The truth is that while the European Parliament and the ECB have a European vision, the ECOFIN Council remains a ‘representative’ of the politically strong governments, namely of Germany and France. The Parliament now tries to remind to the Council that the “ECB must be the only authority to decide whether a bank is failing or likely to fail”. It is impressive that all the all the main political groups of the Parliament are unanimous in defending a truly European Banking Union. To underline this, the statement issued yesterday by the parliamentarians is signed by all the lead MEPs in charge of the negotiations for the second pillar of the banking union that is the single resolution mechanism. The Press release is signed by Sharon Bowles (ECON Committee Chair), Elisa Ferraira (S&D, PT), Corien Wortmann Kool (EPP, NL), Sylvie Goulard (ALDE, FR), Sven Giegold (Greens/EFA, DE) and Vicky Ford (ECR, UK).

No to a politically controlled Banking Union

The MEPs “restate that they will not sign up to a system with serious and evident flaws”. Their main concern is that the resolution mechanism as proposed by the Council leaves ample room for unequal treatment of banks, according to their country of origin. It is a crucial moment where the MEPs want a truly European bank resolution mechanism, while the strong member states want to install in Eurozone a kind of ‘financial directory’. The legislators point to the Council that “Resolution actions concerning a specific bank should be decided only at the executive board level to avoid political power-games and ensure that banks receive equal treatment, irrespective of their country of origin. A role for the Council in decisions on a bank’s resolution must be avoided”.

Concerning the resolution fund and the ten year period as the Council demands for the creation of a truly European backstop mechanism, the Parliament proposes to cut down to three years the time for full mutualisation of the financial responsibilities, stemming from a bank resolution. Underlining its decisiveness to work towards a transparent and effective bank resolution system, the legislators note that the “Parliament will in any case take a plenary vote in April to close its first reading, whether there is an agreement with member states or not”.

Now the ball is in the Council’s yard and Germany and France have to decide what kind of Banking Union they want.