25 June 2013

FT Progress Report: European Union's move to banking union

The rush to a banking union, which started last year when it looked like Spain had become a bailout risk, has slowed and many of the main elements have either been watered down or delayed.

Supervision

The most significant achievement in the banking union blueprint thus far. EU finance ministers reached a deal in December, as promised, despite major disagreements over the scope and powers the new ECB supervisor would have. But the December deal includes some significant compromises. The European Commission wanted all eurozone banks under the new supervisor’s authority, noting that the bank collapses that have wreaked most havoc during the recent crisis – Ireland’s Anglo-Irish, Spain’s Bankia and Britain’s Northern Rock – have all been small or medium-sized.

Germany resisted such sweeping authorities, in part because of pressure from the smaller, politically connected regional banks that dominate the German financial system and, under the new system, the ECB will only have direct supervision over the 200 largest banks.

Direct bank recapitalisation

Critics argue that last deal only partially delivers on EU leaders’ vow to “break the vicious circle” that led bank bailouts to destroy balance sheets of otherwise healthy governments, such as Ireland and Spain. Rather than relieving the burden on national treasuries entirely, a direct recap requires the bank’s home country to invest alongside the ESM.

Bail-in rules

The main sticking point is how much flexibility national resolution authorities should have over “bailing in” bank investors, creditors and, in extreme cases such as Cyprus, deposit holders before taxpayer money is spent on a bailout. A French-led group wants national authorities to be given more freedom to decide when, and on whom, losses are forced. A German-led group, backed by the commission, wants standard rules to apply to all.

Single resolution authority

The timing of the commission’s legislative proposal keeps slipping. Originally, officials had hoped to have it out before this week’s summit, but Germany has resisted, saying the other elements of banking union should be finished first. Now, next week looks more likely.

Even without a proposal on the table, there has been considerable shadow boxing under way, with Wolfgang Schäuble, German finance minister, publicly stating that EU treaties do not allow the transfer of powers to shut down and restructure banks to Brussels. Mr Schäuble instead suggested a “network” of national resolution authorities until EU treaties are changed.

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