While supervision keeps risk-taking in check, resolution is more intrusive. It is about apportioning the costs of risks, if they materialise, among stakeholders. When a bank is wound up, money and jobs are usually lost. Those affected will seek redress. If there is an activity that needs a solid legal base, it is resolution. This is particularly true in a European context. The EU does not have coercive means to enforce decisions. Its historical roots are young. Its democratic legitimacy could be improved upon. What it has are responsibilities and powers defined by its treaties. To take them lightly, as is sometimes suggested, is to tamper with the rule of law.
Limited treaty changes would not just provide a safe legal base for a European resolution authority; they could create a better separation between supervision and monetary functions in the ECB, allowing non-eurozone EU members to join the supervisory regime on an equal footing; finally, they would underline the irreversibility of integration.
Amending the treaties takes time. Luckily, the alternative is not between a legally shaky resolution authority now and the postponement of repair work on the banks.
A two-step approach could start with a resolution mechanism based on a network of national authorities as soon as the new supervisor is operational, the resolution directive has been adopted and the Basel III capital requirements are in place. Instead of a single European resolution fund – which the industry would take many years to fill – such a model would lean on national funds, which already exist in several Member States.
A resolution mechanism focused on effective European coordination and cross-border issues would have other advantages. Unlike supervisory law, by now largely harmonised, the laws governing bank resolution and restructuring vary widely. A decentralised approach may prove better at safely applying these laws. Likewise, significant cross-border resolutions, if any, are likely to involve operations in and outside the eurozone, strengthening the case for a coordinated approach.
A banking union of sorts can thus be had without revising the treaties, including a single supervisor; harmonised rules on capital requirements, resolution and deposit guarantees; a resolution mechanism based on effective coordination between national authorities; and effective fiscal backstops, also including the European Stability Mechanism as last resort.
This would be a timber-framed, not a steel-framed, banking union. But it would serve its purpose and buy time for the creation of a legal base for our long-term goal: a truly European and supranational banking union, with strong, central authorities, and potentially covering the entire single market.
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