Close to final agreement on the EU Banking Union

Yesterday’s Eurogroup and today’s ECOFIN councils are convened almost exclusively to discuss the details of the two remaining gaps in the legal and of course the operating framework of the European Banking Union, which are, the Single Resolution Mechanism and the Resolution Fund. The two legislative bodies of the European Union, the Parliament and the Council, are at odds since the beginning of this year over the mechanism and the fund. The Council wants that the member states exercise a political clout over all decisions of the mechanism, while the Parliament demands that this should be avoided, in order all banks to be treated equally, irrespective of their country of origin. Actually the member states have proposed the creation of a kind of Eurogroup+ council, to be made up also by Eurozone member state government representatives, who will decide everything about the Resolution Fund. This Eurogroup+ will be created by an Intergovernmental Agreement (IGA), outside the EU standard structures, exactly like an international agreement. The Parliament initially opposed this prospect. Step by step As things stand now the ECOFIN is expected today to give the Greek Presidency of the council a wider mandate to negotiate with the Parliament. Understandably the core issues are two; firstly the procedure to decide which bank is near or about to fail, and secondly who will pay for its resolution. Let’s start from the first issue. The Regulation on the Single Supervisory Mechanism came into force on 15 October 2013 and bestowed the auditing and the supervision of Eurozone banks to the European Central Bank, a task that will be officially in force as from November 2014. Within this mandate the ECB may conclude which bank is about “failing or likely to fail”. The Parliament insisted that the ECB must be the only authority to decide that. Now however the legislative accepts that, “A mechanism could be envisaged to ensure that others can effectively voice their concerns”. Compromise on the resolution mechanism This mechanism is one of the two crucial points under negotiation between the two legislative bodies. However it seems that since the Parliament accepted the existence of a mechanism, through which “others can effectively voice their concerns” has almost resolved this issue. Understandably, what is left to be agreed to finalise the Single Resolution Mechanism refers only to technicalities. In reality it will be a mechanism involving the member states in the procedure to announce that a bank is ‘failing or likely to fail’, after an initial proposal of the ECB. The important point in this procedure will be the time element. Such a discussion has to be concluded within one weekend, while the markets are closed. During regular working days official deliberations, about the eventuality of a bank being about or likely to fail, are out of question. The Parliament has insisted that this procedure should be swift and transparent. Intergovernmental Agreement This said, what remains to be negotiated during this week is the resolution actions concerning a specific bank. In this respect though there are still large differences on the involvement of the Resolution Fund. Obviously this question arises in case the bailinable funds of the lender are not enough to cover its resolution or recovery costs. They usually aren’t. The pecking order of the bailinable funds has already being finalized under the draft Bank Recovery and Resolution Directive. Then the Resolution Fund undertakes the responsibility to cover the extra costs. This is exactly what remains to be agreed between the Parliament and the ECOFIN. Earlier mutualisation Yesterday night, at the Press conference after the Eurogroup and the IGA meetings, the President of Eurogroup, Jeroen Dijsselbloem clarified that the member states can compromise with the Parliament on a number of points on the Resolution Fund. He said that the Eurogroup can accept a shorter period for the full mutualisation of the Fund and a more generous liquidity. Answering a question if this period will be closer to the three years the Parliament wants or to the seven years some ECOFIN member states accept, he answered that this will be decided over the next few days in the triangle negotiations between the Greek Council Presidency, the Parliament and the Commission. Full mutualisation means, that all Eurozone member states will be equally responsible for winding up every failing bank of the euro area. It will be the fully mature stage of the European Banking Union. A second point that the Eurogroup decided to compromise on the terms of the IGA, is that during the transition period – before the full mutualisation of the Resolution Fund – the national compartments of the Fund could borrow/lend between them, under framed conditions. There was agreement with the Parliament that the Resolution Fund resources will be used after all the bailinable funds have been exhausted. Negotiations on the Resolution Fund Last but not least there was a unanimous agreement yesterday that there should be a final compromise between the three EU bodies, the Council, the Parliament and the Commission within this month, so as the MEPs can approve it in first reading during the April plenary, the last of this legislature before the May elections. It’s very probable then, that during this week the basic elements of a compromise, over the function of the Resolution Fund, between the Council and the Parliament are in place. This said Dijsselbloem reportedly expects that by Wednesday the three EU decision-making bodies would come to an agreement over the Single Resolution Mechanism (decision-making procedure to wind up a bank). This will be a decisive step which will open the final phase of the negotiations on the IGA for the functioning of the Single Resolution Fund.