Banking union deal is facing criticism

Martin Schulz: European Parliament cannot accept the single resolution mechanism SRM for failing banks as agreed by ECOFIN. Michel Barnier: When I compare it with my original proposal I have regrets.

Erik JonesProfessor of European Studies, Director, Bologna Institute for Policy Research, Paul H. Nitze School of Advanced International Studies (SAIS), Bologna Center, The Johns Hopkins University

This is very much in line with what I have been expecting.  The German government has walked back the financing of bank resolution considerably from the June 2012 commitment to allow direct recapitalization through funds raised by the ESM.  They have also created a structure within which the member states have a final say on whether and how to wind up failing banks.  The only concession is that the decision-making procedures are now streamlined to fall within a 24 hour window.  Apparently that concession comes at the expense of any meaningful role for the European Commission.

The implication of is that we will face a re-dimensioning of the European banking system to make institutions align with their national regulatory and financial capacity.  This implication was sketched by Mario Draghi in the immediate aftermath of the Cyprus crisis during his 4 April press conference.  For larger banks in smaller countries, this will mean extensive deleveraging.  Perhaps smaller banks in those same countries will be able to grow along the way.  The result will be a more even distribution of assets across institutions.  There will be a few standouts.  The UK will retain its large banks and so will Luxembourg, most likely.  The question is whether (and to what extent) those banks will have to modify their financing structures to ensure they have more liabilities to bail in should they come into crisis.

The bottom line is that the European Council has accepted not to sever the links between national banking systems and sovereign finances.  The open question now is whether the ECB and EBA will respond by pushing for some kind of capital set aside against sovereign debt or even limits on exposure to a single sovereign.  If not, then the European situation will be even more vulnerable to a doom loop than it was in the past because of the progressive concentration of home country sovereign debt in the asset portfolios of banks on the periphery of the euro area.  I am not comforted by that prospect.

Fabian ZuleegChief Economist, European Policy Centre

Having an agreement on Banking Union is crucial and should be seen as a positive step out of the crisis.  However, the deal also has a number of shortcomings: it is too national-focused (i.e. there is a reliance on national mechanisms to deal with banks in trouble), complex (which creates uncertainty over how it will work in practice), incomplete (as it does not cover a common deposit insurance scheme) and too long term (the funds from banks will only be there after a long transition period).

More importantly, while Banking Union is necessary to manage risks, it is alone insufficient to restore lending in the crisis countries. Here, we need to do much more to encourage growth and jobs, particularly in the countries most affected by the crisis, for example through insurance/guarantee mechanisms which can encourage private investment.

Jean-Marc TrouilleJean Monnet Chair in European Economic Integration, School of Management, Bradford University

Michel Barnier recently confessed he had ‘some regrets’ concerning the final agreement reached last Wednesday in Brussels. Of course, this was ‘a momentous day for banking union’, as Barnier conceded: an important step forward has been taken towards completing the banking union, which had indeed been facilitated by a Franco-German compromise struck the previous day in Paris. Notwithstanding this, the EU Commissioner for the Single Market and Services would have preferred to stick to a community procedure in which the EU Commission would have been the approving authority to decide whether or not to bail out a bank in difficulty. But this community scenario was not favoured by Berlin. Throughout an 18-month long marathon of negotiations, Wolfgang Schäuble framed the talks with his virulence against leaving it to the commission to take such crucial decisions. So in the end, it is the EU Council that will have the last word. What this means is that, once again, in the recurrent struggle between supranational and intergovernmental EU governance, intergovernmentalism gets the upper hand with yet another strengthening of the Council’s prerogatives. Once again, on top of a complex decision-making process, there will be an area where the Council will have the ultimate authority on whether a bank should be closed, allowing politicians in one member state to decide upon the fate of a bank in another member state. And within the Council, Germany will have more control on decisions to bail out banks.

It is the Council that will take the decisions. It will have the last word (…) It is good that way’, Barnier said, not without some regret. One of the most important actions of Barnier in the last 18 months has been to pave the way towards a banking union. As usual, the Commission proposes, the Council decides. Barnier, who is with Martin Schulz and a few others a potential successor to José Manuel Barroso at the head of the next EU Commission, may find, should he be offered the job, that his Commission will only have limited leeway despite having himself largely contributed to designing the contours of the banking union.

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