The completion of the European Banking Union attracts billions of new capital for Eurozone banks

European Parliament. Committee on Economic and Monetary Affairs (ECON) meeting. Vote on the bank single resolution mechanism and fund. (EP Audiovisual Services).

The European Parliament adopted yesterday with large majorities three legal texts completing the European Banking Union, two years after the initial decision to create a common system, at least in the euro area, of regular bank supervision and resolution of failing lenders. In two separate votes and an approval at second reading without a new vote, the legislators adopted the texts creating the Single Resolution Mechanism, the Bank Recovery and Resolution Directive and the Deposit Guarantee Schemes Directive. The banking union completes the economic and monetary union and ensures taxpayers will no longer be obliged to foot the bill when the banks face difficulties.

The European Sting has followed very closely the many months negotiation between the Parliament and the Council, especially over the details of the Single Resolution Mechanism and Fund. The legislators longed for an unbiased technical procedure in the final decision over a bank to be resolved or recapitalized. In the other side of the fence the powerful ECOFIN council made up by the ministers of Finance wanted more politically controlled decision making.

The final act

The final act of the long negotiations was centered on the functioning of the Single Resolution Mechanism and the Single Resolution Fund. The point of friction on the SRM came to be who will press the control button for a bank to be resolved and the Commission’s role in it. As for the SRF which is expected to cover the extra cost of resolving a failing bank, the antithesis focused on the ‘nationalisation’ or the mutualisation of the financial costs resulting from an eventual resolution.

Finally, a compromise was achieved in mid-way on both the functioning of the SRM and the funding of the SRF. According to the a Parliament Press release issued yesterday, the “Parliament won substantial concessions from finance ministers, especially on the rules establishing the bank single resolution mechanism and its related €55 billion bank-financed fund, steered through Parliament by Elisa Ferreira (S&D, PT). These greatly reduce the scope for power-play politics that could otherwise block action against banks, and ensured that the fund can be established faster and used more fairly”.

New capital starts flowing in

The final agreement between the EU lawmakers may not be ideal, but it permits to arrive at a functioning bank supervision mechanism under the roof of the European Central Bank and an independent Single Resolution Mechanism for failing lenders. In this way, the European Banking Union is well founded and guarantees the smooth reinstatement of the credibility of the currently shaking Eurozone banking system. In view of all that, the most severely hit lenders by the credit crisis in Ireland, Greece, Spain and Italy are now attracting billions of new capital placements invested in their balance sheets.

The ‘too big’ can also fail

The basic idea behind all this legislative work and the brand new Eurozone institutions (single supervision mechanism, single resolution mechanism and fund) are supposed to make the lenders more responsible. The up to now unwritten understanding that the taxpayers will rescue the ‘systemic’ banks if they fail, had to be permanently disbanded. In the new environment the banks will pay, through a levy, to create the SRF which will be capitalized with €55 billion. Many analysts estimate that this kind of money may prove not enough, amidst a crisis like the last credit crunch. For one thing though, the SRM will able to borrow more money if needed, on collateral of its future receipts from the banks.

On top of that, there are currently very positive signs, that the undercapitalized Eurozone banks are able to attract fresh capital and when the official ECB supervision is expected to commence there will be very little to be done in this respect. If the Greek and the Irish banks can attract billions of fresh capital, then every other lender can do the same under much better conditions. In any case, yesterday’s votes in the European Parliament have sealed the new institutions of the European Banking Union, the most important EU project after the introduction of the single euro money.

A new era for Eurozone

After the votes Michel Barnier the Internal Market and Services Commissioner said: “Today, the European Parliament has adopted 3 key texts to complete the legislative work underpinning the banking union…The EU has lived up to its commitments: the banking union completes the economic and monetary union and ensures taxpayers will no longer foot the bill when banks face difficulties”.

Of course the implementation will not be an easy task either. However, the details have been written in black and white and the three legal texts are a safe guide for the realization of the new institutions. Already, the European Central Bank has established its new and independent section to supervise the entire Eurozone banking industry. It applied to the letter the “Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions”. The specific tasks relating to the prudential supervision of credit institutions are conferred on the ECB, according to Article 127(6) of the Treaty on the Functioning of the European Union.

There is no doubt that the Eurozone is now solidly based on the new rules for good fiscal governance in the member states provided by the ‘two regulation package’, and the Banking Union as accomplished yesterday in the European Parliament. The single resolution mechanism was approved by 570 votes to 88, with 13 abstentions, the bank recovery and resolution approved by 584 votes to 80, with 10 abstentions. The update to the deposit guarantee directive was passed without a new vote (this was a second reading approval of the Council position, which reflected the agreement in the trialogue between the Parliament, the Council and the Commission), as provided by the Treaty of Lisbon.

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