Banking union compromise gives states more powers

Long tedious negotiations striving to reach agreement on essential elements of a banking union moved closer to a compromise last night in Brussels, with a design much closer to that demanded by Germany.

It would leave more power with the authorities in each EU state when it came to decisions about winding up banks, but would still be a major step in the development of the euro.

It would establish a board that would take the decisions and play a central role at the European level in all phases of winding-up or restructuring banks.

The European Commission has been largely sidelined but has a role examining board decisions, possibly in an effort to ensure changes to EU treaties are not required. The commission would sit on the board as an observer and if it did not react to a decision on time, the board’s decision would automatically apply.

However, if the commission disagrees in time, the decision would be up to EU finance ministers. Countries not part of the single resolution mechanism would be expected to vote with the majority.

Several options have been put on the table on the voting mechanism that would appear to give big countries a deciding say.

The single resolution mechanism would cover all the banks supervised by the ECB, which are the largest in each country, those that have been bailed out or need resolving, and cross-border banks.

National resolution authorities would be responsible for the banks indirectly under the ECB and more directly under national supervision.

The draft says the contributions by banks to the resolution fund should be based on their size, with an inter-governmental agreement covering the rules on bail-in provisions linked to the use of the single resolution fund and on the transfer of national finances to it.

The fund is not expected to reach its target funding level for up to 10 years and until it does the funds in each national fund compartment would be earmarked specifically for institutions in that member state. This earmarking would be phased out over the 10 years.

There is no mention made in the draft of the EU’s rescue fund, the European Stability Mechanism. It was mooted that it could backstop or guarantee the fund initially while it was being built up to full strength.

Instead it says that in case the fund is not sufficient to cover losses or the costs of the resolution of a bank, the National Resolution Authority will raise the cash from authorised institutions in the state concerned, as dictated by the board.

The finance ministers may reach political agreement on the complex structure but may return to meet in Brussels next week to finalise the deal when new the German coalition government is expected to be in place, and just before the EU leaders summit on Dec 19/20.