Banking Union fails to fly

Banking Union 2

Finance ministers failed to reach a deal on bailing out banking institutions after lengthy negotiations dragging on till early Saturday morning. Talks will reconvene this week in a desperate attempt to reach agreement before the Summit. It won’t to be an easy task as positions are widely split on the scope of bail-in rules to be enforced Community-wide.

Countries outside the Euro zone refuse to apply the same discipline as in-partners, claiming they do not enjoy access to the European central bank liquidity facilities nor to the common banking rescue fund. But the main divisions arise between the German-led countries backing a tough line on the burden creditors should bear in wiping out liabilities stemming from bank collapses. France and others flatly refuse to give in to such hard medicine, pleading for far more flexibility in devising bail-ins. But unless a clear set of rules is enacted on the realm of creditors bound to lose their money in case of failure, blatant distortions would ensue should countries address bail-ins according to their own will and financial muscle.

The Irish presidency has proved unable to break this deadlock despite considerable efforts in bridging divergent positions. Its compromise proposal forcing equity and senior unprotected bond holders to take up losses amounting to 8% of total liabilities sounds too loose for Germany. It provides ample discretion for addressing other types of creditors. Worse than that. Should the failure bill amount to a considerable sum, pressures to tap on the European rescue fund are more likely to be triggered.

To prevent this scenario, Germany has made sure that direct recapitalisation from the Euro zone rescue fund is trimmed down to a 60 billion ceiling unless exceptional circumstances occur. Furthermore, it has secured that national financing fills the gap should tier one capital come below the 4.5 threshold. Beyond that frontier EU funds might be tapped so long a minimum 20% national co-responsibility is preserved.

All in all, the main added value of Banking Union stands being downgraded. The core goal of decoupling sovereign and banking risks will be largely diluted. A bad omen when the EU intends to enter into the unknown territory of common banking supervision. A task the central bank is reluctant to take up unless a thorough due diligence review is undertaken to detect balance sheet shortcomings. As this exercise may end up disclosing a vast amount of cash needs, the absence of a solid backstop acting as a credible buffer could lead to further turbulences. Especially if the markets fail to be convinced on the less affluent partners’ ability to raise enough resources.

Both the European commission and the ECB are eager to put in place an independent resolution mechanism able to provide a clear message as to their will and resolute stance when it comes to wind up entities beyond any reasonable hope. Here again they clash with Germany and France, adamantly opposed to hand over the highly sensitive issue on who decides on banking liquidation. Instead they push for a body firmly controlled by national authorities. Depriving the ECB of the capacity to deal, no matter the political considerations, with ailing entities does undermine its authority in the field of supervision.

The next Summit will probably prove unable to redress the course this dossier is taking. But unless bold steps are taken in the near future, the Euro zone risks dwarfing the Banking Union far below its initial ambitions.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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