Brussels, 25/10/2013 (Agence Europe) - If it were possible to conclude only one issue before the end of the current European Parliament, that issue would be banking union in the eurozone, and European leaders have stressed the importance of concluding the draft legislation on a bank resolution mechanism by March 2014.
This will require formal inter-institutional agreement by the end of 2013 on the BRRD directive harmonising national bank resolution schemes and member states' savings guarantee systems. Agreement will also be needed in December among the member states on the single bank resolution mechanism (SRM). The European Summit on 25 October said the SRM needed to be aligned with the BRRD directive. This would seem to refer to the operational details and timings for bail-ins (taking contributions from shareholders and other lenders to a bank if the bank collapses).
“Once supervision is European, we cannot leave failures to the national level”, said the president of the European Council, Herman Van Rompuy, referring to the final adoption of legislation a week ago to introduce a single bank supervision mechanism under the auspices of the European Central Bank (ECB). Welcoming the “irreversible” process of banking union, the French president François Hollande, said a good compromise had been reached by the two main economies in the eurozone, setting out a timetable and improving on the procedures for setting up banking union. The Italian prime minister, Enrico Letta, said that banking union was subject to “transitional” discussions before tough decisions are taken at the December summit.
On Thursday evening, the head of the ECB, Mario Draghi, presented the heads of state with details of the methodology to be used by the ECB to assess the strength of the European banking sector by November 2014, when the ECB officially becomes the new supervisor of eurozone banks (see EUROPE 10949). Spanish prime minister Mariano Rajoy said that, if the ECB's assessment is exhaustive, rigorous and independent, then it will help restore confidence. He said a similar approach was taken by Spain in 2012 and had had a very positive impact on the markets. The collapse of the Spanish property bubble, however, then forced Spain to request aid from the eurozone of more than €41 billion.
Backstops. Van Rompuy said that the ECB's analysis of bank balance sheets was very important and governments needed to prepare for it on time by setting up national safety nets. Hollande said Europe must move towards a supervision system with a safety net, after which the question of bank recapitalisation would need to be settled.
In the conclusions document, the European Summit says it is urgent for banks involved in banking union to have national bailout funds that comply with EU state aid rules, and the Ecofin Council is asked to draw up a common approach to this by the end of November. The document says that “European instruments”, meaning the European stability mechanism (ESM), are already available but the Eurogroup needs to finalise guidelines on the direct recapitalisation of banks.
The summit's agreement in principle on the BRRD directive notes that the ESM will be able to intervene as a last resort in the process of winding up a failed bank. At the last Ecofin Council, Germany doubted that it would be possible to use the ESM for this purpose (see EUROPE 10943), wanting recourse to the ESM to be a genuine obstacle course, and subject to the right of veto. In order to reduce the use of public cash, Berlin wants the bail-in rules to be brought forward to 2015.
On Thursday evening, the president of the European Parliament, Martin Schulz, said that, without a safety net, the ECB would be in a situation where it could make crisis simulations and assess balance sheets, but the threat of destabilisation of the financial markets would persist. (MB/CG/FG/transl.fl)