Banking union will ‘spell end of bailouts’

If the EU banking union proposals are implemented in full then it will avoid governments having to bail out banks in the future, according to Gert Jan Koopman, deputy director general for state aid at the European Commission’s Directorate General for Competition.

Ireland was forced into a €64bn bailout of the banking system following the property market crash in 2008. It now owns AIB and Permanent TSB and has a 15% stake in Bank of Ireland.

The Government has submitted a restructuring plan to the European Commission for Permanent TSB to split it into a good bank/bad bank and a separate unit for its UK operations.

Mr Koopman did not make any reference to the Irish banks in his address to the Institute of International and European Affairs in Dublin.

The issue of state aid for eurozone banks has sparked many controversies since the crisis erupted in 2008.

The burden of bank debt undermined the country’s economic sovereignty and prompted the government to apply for an EU/IMF bailout in Nov 2010.

Mr Koopman said the rules around state aid to the banking system have evolved significantly since 2008.

All banks across the eurozone face asset quality reviews and stress tests over the remainder of this year and during 2014.

The ECB will publish the results of these tests in Nov 2014.

If the banks show a shortfall in capital then they will be given six months to raise the required amount through investment or other private measures.

If after six months there is still a capital shortfall, then the banks will be forced to bail in shareholders and junior debt holders to plug the hole.

If there is still a shortfall, there is still no political decision as to what happens next. Berlin wants national government to recapitalise banks through national backstops. However, the ECB and the commission want to break the link between sovereigns and bank debt.

It is believed that one possible solution is that the ESM could extend a credit line to national bank resolution funds until, over time, these funds are sufficiently well-capitalised from levies imposed on the financial sector.

Mr Koopman said that it was likely that all average-sized banks across the region will not have to be recapitalised above any bail-in of shareholder funds. However, any of the larger banks that would still need capital will be subject to state aid rules.