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Thursday, July 11, 2013

Commission banking union plans met with scepticism

As we noted in our flash analysis yesterday, the European Commission has put forward its plans for a Single Resolution Mechanism (SRM) which would oversee the eurozone banking union, manage bank resolution and enforce the recent bank bail-in plans.

The proposal seeks to move quickly and decisively to create a strong banking union but do so within the current framework of EU treaties and domestic politics. Unfortunately, it seems to have found itself in the worst of all worlds. The mechanism is unlikely to be large enough or responsive enough in a crisis, while it will not be in place until 2015 at the earliest. Furthermore, it is based on a significant legal stretch of the EU treaties, which has already raised objections from Germany and creating concerns for non-eurozone members (due to fears that the EU's single market could be hijacked by the eurozone).

The German response was swift and hostile. At a press conference German Chancellor Angela Merkel’s spokesman Steffen Seibert argued:
“In our view the Commission proposal gives the Commission a competence which it cannot have based on the current treaties…We are of the opinion that we should do what is possible on the basis of the current treaties.”
Dr Gunther Dunkel, President of the influential VÖB (the German association of Public banks) added:
"We reject the creation of a European resolution authority for many good reasons …it is not up for discussion for us, that funds gained through the work of German banks are used to contribute to the rescue of banks in other Member States… [Furthermore] the SRM would require a change to the EU treaties to necessitate harmonised corporate, insolvency, and administrative procedural law.”
The FT cites an unnamed German official as saying:
“We would be willing to speed up the process, but then the proposal has to be realistic…The commission is behaving like a vacuum cleaner, sucking up everything into its proposal. It may be effective but it is not legally safe.”
Dutch Finance Minister Jeroen Dijsselbloem was none too keen either, suggesting (in what seems to be a veiled insult to the Commission) that the new authority had to be "decisive, effective, and impartial," adding, "It's not completely decided what that authority should look like."

All in all, a rather disappointing proposal given the numerous delays (it was due out at the start of last month) and the fact that it forms such an important pillar of banking union. The Commission’s inability to produce the full text of the proposal, making detailed analysis difficult, also provoked some understandable outrage.

There was also another interesting development on the banking front. The Commission yesterday confirmed the expected changes to bank state aid rules which will come into force at the end of this month. The rules mean that any bank receiving aid would have to present a restructuring plan in advance, likely with shareholders and junior bondholders taking losses. Any bank which accepts aid will also face strict limits on executive pay.

The move may seem innocuous but, as we have consistently pointed out, all other changes to bank regulation and supervision won’t come in for some time. This means that the new rules on state aid will de facto enforce some of these measures, in particular the move away from bailouts towards bail-ins. That at least adds some limited certainty but still leaves the banking union looking woefully incomplete.


Rik said...

Typical Barrosso (give an r or an s) approach.
Start with an awful lot powers for the Commission and hope that during negotiations not too much will fall off.

Totally predictable strategy. Predictability gives bad results usually as the other side can prepare itself well on it.
And in this case counterproductive (I would even say simply moronic).
What it does is simply delay things in the first place.
Very unlikely to happen.
And second it f's up the structure of the legislation. You are likley ending up now with a basic structure based on this proposal with a zillion amendments making it a Frankenstein piece of legislation from the start.

No president material playing cheap political games over an essential piece of legislation for the rescue of the EuroZone (whatever you think about that).

Jesper said...

The proposal comes from people cut off from the real world. The problem pointed out by Dr Gunther Dunkel is obvious and only people living in ivory towers could possibly have failed to spot the problem.

If the proposal does not come from people living in ivory towers then the only reason I can think of that motivated the commission to propose such a bad scheme is that it isn't a real proposal, that it is intended to provoke a reaction which possibly could lead to gathering of information.

The problem with banks that are too big to fail is that they are simply too big. Nothing can change that. Banks that are too big have to be shrunk or cut up into smaller pieces.

Denis Cooper said...

This wouldn't be the first time for some part of the EU treaties to be stretched beyond breaking point, and nor would this be the first time for the German government to huff and puff about something not being possible under the treaties before deciding that it was possible after all, and nor would this be the first time for the weak UK government to fail to prevent a dangerous precedent being set.

Anonymous said...

The German daily Sueddeutsche Zeitung is citing Stephan Goetzl (president of the Bavarian Association of Cooperative Banks) who explicitely compares the EU proposal for the SRM with the Enabling Act of 1933. So either Bruxelles and Berlin find a way to deal with Germany's public banks or the SRM is going nowhere.

Those reactions out of Germany were totally expectable and the opposition towards this proposal will not vanish after the elections. So what was the EU thinking in the first place?!?

DVK said...

I do not understand what the Commission has to do with it.Euro countries go with a set of rules imposed(hopefully) by ECB. The other countries go by rules imposed by their own Central Banks and Governments.British Banks can be saved by their Government Cyprus banks can be demolished by the Eurogroup.Let us first know the real situation of major European Banks which is not such a well kept secret anymore and the we can discuss what and how to do about them .All these German legal and moral objections make me wonder about the health of their Banking System.Why the German insistence to remove this function from the ECB who should be the Custodian of the Euro and thus Eurobanking?is it because Baroso and Co are more manageable and easier to crush?

Jesper said...

A link to stenographic notes from the parliamentary committee in Sweden who is dealing with EU-matters:

It is from 2 weeks before the publication of the proposed directive.

">>> Hemlig enligt 15 kap. 1 § offentlighets- och sekretesslagen <<<" means classified and not for the public to know. The amount of times it comes up regarding EU is amazing, especially as EU is supposed to be transparent.

The gist of the discussions appear to be that the solutions that were floating around in EU were incredibly bad - privatising profits and socialising losses. The actual proposal from the commission is doing the exact same thing, privatising profits and socialising losses.