Germany rules the banking industry of Eurozone

Strasbourg, 15/04/2014. European Parliament, 7th Parliamentary Term. Press conference on Banking Union. Michel Barnier, ex-Commissioner responsible for the internal market (second from left), Sharon Bowles, then Chair of ECON Committee (ALDE, UK) (in the middle) and three members of the previous Parliament associated with the inter-institutional agreement for the creation of the European Banking Union, Elisa Ferreira (S&D, PT) (second from right), Gunnar Hokmark, (EPP, SE) (first from left) and Peter Simon (S&D, DE).

Last Tuesday the European Parliament approved the appointment of the Single Resolution Board members. European Sting readers may recall that some months ago this Board emerged as the most powerful institution in Eurozone’s banking sector. Its powers were established by the final agreement between the European Parliament, the European Council and the Commission which instituted the Banking Union of Europe in May this year.

The omnipotence of the Board is clearly described in the following passage: “Upon notification by the European Central Bank (as supervisor) that a bank is failing or likely to fail, or on its own initiative after having previously informed the ECB, the Board will adopt a resolution scheme placing the bank into resolution” (see Council of the European Union ST 11814/14/PRESSE 397/Brussels, 14 July 2014). In short, the Board single-handed is able, even by simply informing the European Central Bank, to place a major European bank or a financial group under a resolution scheme.

Who can liquidate the banks?

Let’s see now, who are the members of this authoritative institution which was established to rule Europe’s Banking Union. Not to forget that the Banking Union is the greatest accomplishment of the EU after the introduction of the single currency. The Board’s members approved by the Parliament last Tuesday are Elke König (DE) for the Chair position, Timo Löyttyniemi (FI) for the Vice-Chair position and Mauro Grande (IT), Antonio Carrascosa (ES), Joanne Kellermann (NL) and Dominique Laboureix (FR) as members. Come a financial crisis, God forbid, those people may decide who and how is to pay the cost. The Board’s principal responsibility covers the 130 systemic Eurozone banks, based in the 18 member states.

In all cases, be it a major cross-border lender or lenders directly supervised by the central bank (the 130 systemic banks), the national resolution authorities will be obliged to apply the resolution schemes as designed by the Board. If a national authority doesn’t comply with the decisions of the Board, the latter will be able to address executive orders directly to the troubled bank. There is also an extended format of the Board, the Plenary, which comprises representatives of the country where the bank in question exercises its main activities. The Plenary version is responsible for resolution decisions, requiring more than €5 billion in capital.

Make or break a country

Presently, with many Eurozone member states being largely over-indebted and Europe’s major banks still under-capitalised, the role of the Board appears crucial. In the dreadful event of another minor or major financial crisis, the workings of the Board will be central. There are more reasons for that. As everybody knows in most Eurozone member states, there is an unholy relation between government and the country’s banks. This umbilical cord invariably relates the solvency of every country’s major banks with the creditworthiness of the national exchequer.

In other words, the Board has also the power in a given occasion to indirectly pronounce a Eurozone member state as bankrupt, just by putting under a resolution or recovery scheme the systemic bank or banks of the country. The example of Ireland and Cyprus are characteristic on this case. This said, a situation might appear where the Board could have the options to either work to nationalise the cost of a crisis, or strive to divide it conjointly with the rest of Eurozone member states and save the particular member state. Obviously, the Board has the discretionary power to either condemn or save a country from bankruptcy. In short, this Board is the dream of every bureaucrat, also because the Board is not directly accountable to an elected body.

Actually, the Board can make or break a member state starting from the banks. To note that the ECB and the Board are responsible for all the 130 European systemic banks, which include all the major lenders of the al 18 member states. The truth is that, if a member state like say Greece or Italy be obliged to undertake alone the burden of resolving or recapitalising one or more of the country’s banks, when they fail or be close to failure, their exchequer will go bankrupt too. We saw that clearly in the cases of Cyprus and Ireland. Both countries were fiscally sound, but couldn’t stand the cost of resolving or recapitalising their failing banks. They both were left alone to rot.

Six persons hold the keys

Now, those six members of the Board will be involved in all that. As tradition has it, in all EU institutions people in key position are there to protect primarily their home country’s interests, despite taking an oath of impartiality. In the case of the people named above, we have one German and another two coming from Finland and Holland. The two last countries are being counted by most analysts to the German sphere of influence. Then it’s a French, an Italian and a Spaniard.

The chair person, Elke König is the former head of the Germany’s Federal Financial Supervisory Authority (BaFin), right from the heart of the German Federal government bureaucracy. Obviously in case of a tie, the vote of the President would weight on the balance. So it’s much easier for Germany and its allies to formulate a crucial final decision for a bank, and indirectly for a country, than for the other three member states.

A formidable mechanism

Undoubtedly, this development equips Berlin with a formidable weapon in financial field of Eurozone. Germany now has the ability to make vital decisions concerning the banks of all the other countries. By the same token though and due to the existing very close links between exchequers and banks, Berlin can indirectly decide on the creditworthiness of governments too. In three cases, namely the solvency crisis of Ireland, Cyprus and Greece, Berlin was recognised by the rest of the member states (for example France, Italy, etc.) as the central decision-making agent in engineering a solution. And everybody knows what the outcome was in all those circumstances.

It’s a fact then that Germany is not only the economic powerhouse of Europe and the main anchor of the single euro money. She now also acquires the leading institutional role to decide on everybody’s creditworthiness.