Dublin, 12/04/2013 (Agence Europe) - Aware of the waves of reaction to the bailout of Cyprus, the Ecofin Council in Dublin on Friday 12 April said that work must press ahead to introduce banking union in the eurozone and possibly elsewhere.
The first stone in the foundation of banking union is the setting up by the spring of next year of a eurozone bank supervision mechanism under the aegis of the European Central Bank. The finance ministers examined changes to the draft legislation suggested by the Irish Presidency of the EU Council of Ministers at the request of Germany (see EUROPE 10817).
The only truly controversial measure is a potential statement in which the member states pledge to consider in a constructive manner any proposal to change the treaty to put the bank supervision mechanism on a legal basis that would ensure fairness of treatment between eurozone and non-euro member states and also further separating monetary policy from bank supervision within the ECB. Those around EU Internal Market Commissioner Michel Barnier say that the bank mechanism is needed rapidly and it takes a long time to effect treaty change. Fearing that, if the German request is gone along with, it would open the floodgates to legal challenges, an expert in Barrier's circle said that further improvements could be made on the legal front. Confident of the Ecofin Council's ability to find a solution at its informal meeting in Dublin, he recognised that the same issue might emerge in the talks on setting up a European bank resolution authority and a bank resolution fund.
Bank restructuring. The Cypriot situation is an indication of what happens when there is no banking union, said the Commission expert. Before the Cypriot bailout, there were no bank bailout systems in place. In return for financial aid, Nicosia will have to restructure its two biggest banks, Bank of Cyprus and Laiki, with shareholders, lenders and savers (savers with more than €100,000 in the bank) will lose a hefty wedge of their cash, some more than others. This is the first time this has happened in Europe and has brought strong reaction from investors.
The introduction of harmonised bank bailout and bail-in rules in the EU is the second stage of banking union. Two draft items of legislation are already on the table, one to harmonise national bank resolution schemes and one to harmonise savings guarantee systems. Once the two items of legislation have been adopted, the Commission will unveil details in June of the first stage of a bank restructuring mechanism with the creation of a special body for this purpose that is independent of the ECB, along with the creation of a special EU bank resolution fund.
“In the light of recent developments, members stressed that further clarity is needed, in particular in establishing a clear creditor hierarchy and pecking order of bail in-able instruments. Some members expressed themselves in favour of clearly designating the place of uninsured depositors in the creditor hierarchy, while others advocated caution considering the market impact and consequences on the cost of bank funding of such a decision”, stated Council experts in a preparatory document ahead of the Friday meeting.
Four northern countries, including Germany, want bank “bail-ins” (savings raids) to be possible from 2015, three years ahead of the date initially recommended by the European Commission (see EUROPE 10818). Barnier is now open to such a timing. France, more cautiously, recommends definition first of bail-ininstruments before deciding on the timescale. (MB/transl.fl)