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Brussels unveils next building block in banking union

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(Globalpost/GlobalPost)

The European Commission unveiled Wednesday what it called the "second and final cornerstone" of its ambitious banking union, with proposals for dealing with failing banks.

The Single Resolution Mechanism (SRM) -- viewed sceptically in Germany -- will give the Commission the power to shut down any of the eurozone's 6,000-plus banks, even if the national authorities of the country affected disagree.

The SRM is the second pillar in Europe's banking union alongside the single banking supervisor being set up under the aegis of the European Central Bank.

"The idea is to break the link between the banking crisis and sovereign debt so that we no longer have to call on the taxpayer," EU's Internal Markets Commissioner Michel Barnier, who drew up the new proposals, told a news conference. "We must put an end to that."

Countries have spent vast amounts of taxpayer money trying to prop up struggling banks and that has increased the countries' own debt burden.

Barnier said that "prevention is always cheaper than repair and cure" and having a single banking supervisor would be part of the prevention work.

A single resolution mechanism would provide the necessary set of tools, he said, adding that "well-prepared repair is cheaper and better than when you improvise."

At the end of June, the 28 member states agreed a common set of rules laying down the pecking order for creditors to take losses when a bank needs to be rescued or wound up.

Those rules have yet to be approved by the European Parliament.

The single resolution mechanism will comprise both a resolution board and funds that will click into action once the ECB has sounded alarm on any bank in trouble.

The board -- made up of representatives of the ECB, the European Commission and the national resolution authorities -- will decide how a bank is to be resolved and make recommendations to the Commission.

The Commission would hold the final decision.

The operations would be funded by mandatory levies on the banking sector, thus alleviating the burden on the public purse, Barnier said.

In extremis, if national public money was still needed, the minister of the country concerned would give his agreement. But this would become the exception rather the rule, Barnier said.

Had such a mechanism been in place five or 10 years ago, it would have been able to cover all bank crises with the exception of perhaps Anglo-Irish, Barnier argued.

Over the next decade or so, the fund could grow to amount as much as 70 billion euros ($90 billion), Barnier said.

The Commission's proposals for the SRM must nevertheless overcome scepticism in Germany which believes such a mechanism is not currently compatible with EU treaties.

Barnier insisted that during his extensive consultations preparing the proposals, he had listened "very carefully to what people tell me about the need for legal certainty. My relations with (German Finance Minister) Wolfgang Schaueble are very good."

But Barnier insisted the priority was to act within the current premises of the treaty and "improve and consolidate" the mechanism if and when treaty changes are deemed necessary.

"We've chosen the current treaty basis. We can't await such a change to solve our problems. We have to tackle them now. That's our responsibility," he said.

Deeper down, Germany is unhappy with the idea of a single resolution fund because its banks would be required to foot the bill for the rescue or resolution of banks in weaker eurozone countries.

Giving the Commission the ultimate say is therefore causing rumblings in some member states.

Another problem is that the resolution mechanism itself is to come into effect in 2015, while the rules it will be empowered to apply will not be in place until 2018.

And the resolution fund itself will need years before it is fully funded.

So all in all, the entire project is surrounded by uncertainty.

Barnier said that all 28 Commissioners had "unanimously approved" his proposals.

He now hoped for an agreement to be reached at ministerial level "between now and the end of the year," he added.

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http://www.globalpost.com/dispatch/news/afp/130710/brussels-unveils-next-building-block-banking-union-0