A week to decide if the EU is to have a Banking Union

Ioannis Stournaras, Greek Minister for Finance and President of the ECOFIN Council signs documents. (Council of the European Union photographic library, 18/2/2014).

Ioannis Stournaras, Greek Minister for Finance and President of the ECOFIN Council signs documents. (Council of the European Union photographic library, 18/2/2014).

This Monday and Tuesday, 10 and 11 March during the Eurogroup and the ECOFIN meetings respectively, the member states will show their willingness to compromise with the Parliament, in order to finalise the legal base of the European Banking Union. This would be the most important EU project after the common currency. The Banking Union will guarantee that Eurozone banks are closely and effectively monitored and supervised by the European Central Bank using standard and clear supervision rules. It will also make sure that in case the supervisor finds that a lender is near a failure, there will be a uniform and pertinent resolution procedure in place, with standard and transparent rules for the line of bailinable funds. This process will also guarantee the existence of extra resources to accomplish the resolution or the recovery procedure.

Footing the capital bill

While the mandate and the rules the ECB is to use in its supervision role are in place and the Bank Recovery and Resolution Directive is already in force, the member states, as expressed by the ECOFIN council cannot agree with the Parliament and the Commission on the coverage of the cost of eventual bank failures during the next two or three years. Before the official establishment of the Single Supervisory Mechanism under the ECB in autumn 2014, last October the central bank commenced an exercise. This operation, which will last twelve months, is testing the quality of assets and the resilience of Eurozone’s banks under stress. Those tests will certainly reveal large needs in new capital for Eurozone banks.

Already the four largest Greek banks are estimated to need anything around €6 billion in new capital. If the capital markets appear reluctant to cover the new capital needs, the funds have to be secured form other resources presumably of public character. It is exactly these capital needs (resolution and recovery funds) and the procedure to finance them (single resolution mechanism) that have now become the point of controversy between the Parliament and the ECOFIN council. To answer this question the European Commission has proposed a Single Resolution Mechanism (SRM) for the Banking Union which includes a single resolution board and a single resolution fund to tackle future bank crisis with minimal costs to taxpayers and the economy.

Last minute dealings

The member states insist that the final decision to resolve a bank rests with the ECOFIN and also that the resolution funds remain a national affair at least for the next five years, until the ECB supervision could guarantee that no bank is near to failure. On top of that, the ECOFIN has introduced an Intergovernmental Conference and Agreement which will decide on the use of the resolution funds with procedures outside the EU structures. This process will be controlled only by member states without the intervention of the Parliament or the Commission.

Two weeks ago, the Greek Presidency of the ECOFIN council received a mandate from member states to negotiate with Parliament on these issues. However, the mandate didn’t leave much space for negotiations and 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. On 6 March, the European Sting writer Suzan A. Kane noted that ‘ 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” ’.

No much time left

Now the Greek Presidency asks for a new proxy, with wider negotiating powers in order to start the talks with the Parliament again. Towards this end, the Greek Presidency yesterday issued a Press release asking the ECOFIN for a new authorization. It reads “As regards the proposal for a Regulation on a Single Resolution Mechanism for banks (SRM), the Council will be called to revise the mandate given to the Presidency, with a view to finalising negotiations with the European Parliament at the next trilogue”.

Everybody agrees though, that the whole issue has to be settled within this legislature, so as the Parliament could pass the new Regulations in April before it is resolved ahead of the May elections. In view of that, the coming week will be very decisive regarding whether Eurozone is to have a Banking Union. Finally, it’s worthwhile mentioning that the non-Eurozone EU members can join the Banking Union if they accept its principles.

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