European Banking Union: no one is perfect

Europe came to an agreement last Thursday 20 March to complete the second pillar of the European Banking Union with the establishment of the Single Resolution Mechanism (SRM). After months and months of negotiations between the European Parliament and the member states, Europe will have as of now the relevant legislation and the mechanisms to function a banking union. Thus the most challenging and ambitious integration project since the creation of the European Union was finalized last week. After hours of intense negotiations, the European parliament and the EU member states agreed to the creation of a single system to handle a potential banking crisis in Europe. The authority that was given to the European Central Bank for supervision was the first step towards the banking union. It is believed that the Single Supervision Mechanism (SSM) under the ECB will be tougher and more independent. “The SRM would apply to all banks supervised by the SSM”. The Single Resolution Fund has a target of €55 billion and all banks will contribute. The accumulation of the resources will be over a period of 8 years. This is earlier than the initial 10 years of the plan, but still far longer than the target ECB envisaged. The funds that are needed for the first year are 40% of the final target, which means that the bigger proportion of the money is needed in the first years. While the Fund is a very essential step for the completion of the banking union in Europe, there are concerns though that it is not big enough to cover the needs of the banks that need to be ‘shut down’. The ECB will be the institution responsible to sign the alarm when a bank is failing. After that the Commission, the Board and the national resolution authorities will take part in the decision-making process for the further steps that would be needed to take. Despite the fact that the participation of many different interest groups is very important in any democratic procedure, the big number of decision makers will possibly make the decision-making process inflexible and time consuming. Time is very important when we have to deal with bank ‘closures’. In order to avoid a banking chaos in the market, this procedure should be put on paper during the weekend. It is very difficult for that many conflict decision-makers to agree to the resolution of a bank in such a short period of time. Germany was, as always, opposed to anything that involved mutualisation of obligations, because it didn’t want its taxpayers to pay one euro for the failure of other European banks. However, Germany and the other members had to come to a compromise, in order to agree for the creation of the SRM. One important reason for the ‘rush’ to come to an agreement now and not in June, is nothing else but the coming European elections in May. Everyone in Brussels is afraid that the political scene may change after the elections and then it would be difficult for any similar challenging proposal to pass. Hence, there was a tremendous pressure to all the involved parties to conclude to a proposal for a banking union now, even not a ‘perfect’ one. Besides, the ‘imperfection’ of this banking union was also recognized by the EU Commissioner for the Internal Market and Services, Michel Barnier: “Today’s compromise allows us to complete the architecture of the banking union for the Eurozone”…“The Single Resolution Mechanism might not be a perfect construction but it will allow for the timely and effective resolution of a cross border bank in the eurozone thus meeting its principal objective”.