Better a late banking union than none

Members of the European Parliament and of euro zone’s states had dinner later on Thursday over discussions on the Single Resolution Mechanism, which is the banking union’s second and decisive pillar. The night meeting seemgly suceeded as they reached a deal to fix the common device for the winding of banks in crisis as well as the new fund of €55 billion for bankruptcies’s financing. This agreement will allow complete the banking union before the end of current term. European leaders are expected to ratify the deal in the Brussels’ summit starting today, while the European Parliament will approve it in its last weekly session between next 14-17 April.

The aim of the Single Resolution Mechanism is to make banks instead of tax payers top to support the cost of future crisis. European financial entities will finance the fund of €55 billion with their own contributions.

The agreement also will mean to shorten the period for the fund’s creation from 10 years to 8. Furthemore, the pace to start the process of sovereign debt mutualisation is to speed up to achieve gathering of 70% in the first three years. It also leaves aside Germany’s red lines for the EU financial system since their authorities required a 10 years period of transition in which each member state would pay for their own banks.  At the end, MEP’s have accepted a longer period in exchange for accelerating mutualisation.

The first leg of the European banking union has involved to accept ECB’s role as single supervisor of euro area’s entities, which will start at the end of present year after stress tests. The third pillar, which is the creation of common system of deposit guarantee fund, is still pending on Germany’s unblocking.

Madrid’s take on banking union

During the two years the project has been discussed in Brussels, several Spanish economists have expressed their opinions over it via our publicacion. These following are some of the most outstanding:

J. P. Arrese said on December of 2013:

“No one can claim the agreement stands as a hallmark of excellence and fine craftsmanship. It amounts to a rather shabby outcome taking on board both the Southern countries desire to enforce a common resolution authority and the stubborn German insistence on avoiding at all costs shifting the bill to taxpayers.”  He also added that “Europe must face the prospect that desperately trying to salvage lame ducks beyond any reasonable hope of recovery leads to blatant ineffiency. Severing the link between public bonds and financial risks is better served should dead entities be entitled to a funeral service instead of fresh public money. Responsibility for rescuing troubled banks should rest on the healthy ones. You can bet on them for making good use of wreckage assets.”

On his its part, at the end of last January, commented that “the non-cooperative attitude of the German authorities on the national-vs-mutual nature of the resolution fund rests on highly questionable grounds. There is no a priori reason to suspect that Germany would have to keep dousing fires in banks throughout the EMU. Some of our banks, and some of their banks, can regrettably be blamed for performing a similar “comedy of errors” in total disregard to its impact on critical macroeconomic variables, such as the national budget or public debt, or on the present or future burden on taxpayers.” He concludes his argument by stating that “none of the systems stands as a paradigm of excellence. In the final analysis, who knows, a mutualised resolution fund –if it ever came to life- might have to start operations by bailing out a German bank!”