Brussels, 19/12/2013 (Agence Europe) - On Wednesday evening, European finance ministers approved a general approach on the single resolution mechanism (SRM) for failed banks, allowing the Presidency of the EU Council to begin talks with the European Parliament with a view to conclusion by the end of the legislature. The Parliament had already made known its dissent over some of the key provisions.
Ministers have therefore got their act together on what Italy described as being something that was destined to become the “most relevant change for the eurozone after introduction of the euro”. It is indeed a significant stage in integration. The participant states give themselves ten years in which to have a common resolution fund with a capacity of €55- 60 billion (i.e. 1% of deposits covered). The single resolution mechanism, which will implement the rules on banking resolution as described in the BRRD (bank recovery and resolution directive) (see EUROPE 10983) for all banks supervised by the single supervisory mechanism (SSM), placed under the responsibility of the European Central Bank, should be up and running by January 2015.
Functioning of the single fund - EP out of play. The question of the legal base has long been a bone of contention, mainly due to reticence on the part of Germany. Coming under the Community method will be the setting in place of the single resolution method as well as the establishment of the single fund and its national compartments (explained hereafter) on which its structure will initially be based, as well as decisions relating to the way it is used.
The question of the way in which the single resolution fund is used, including the gradual merging of national compartments, will be treated separately within an intergovernmental agreement that is to be negotiated for accord by 1 March 2014. The intergovernmental agreement would specify the details of the transfer from the national contributions to the fund and their gradual mutualisation over the transitional ten-year period. It would endorse the “bail in” rules of the BRRD directive as applicable to the use of the single fund. Bail-in and resolution functions would apply from 1 January 2016.
There is the risk that the idea will not please the European Parliament. Its president, Martin Schulz, moreover, had already criticised this aspect of the ministerial agreement on Thursday morning during a joint press conference with the Luxembourg prime minister. He predicted very long negotiation in trialogue.
Michel Barnier, the commissioner responsible for the internal market and financial services, said he would have “preferred to keep Community procedure to the very end”. Lithuanian Finance Minister Rimantas Sadzius felt it was important to ensure that both texts take effect at the same time.
In practical terms, firstly, the architecture of the fund would therefore be based on national compartments, each fuelled by contributions from the banking sector at national level, from 1 January 2016. Little by little, by way of 10% per year, the funds would be mutualised.
Decision-making process. The Commission is not bitter about finally not having been designated as the body able to trigger the bank resolution process. Once the machine is well-oiled, it is the ECB that will take the first step, signalling to the resolution board to be set in place (as well as to the Commission and to the relevant national authorities) that a bank is in a critical state. The resolution board would prepare the supervision plans for all banks directly supervised by the ECB and the cross-border banks. The national resolution authorities would, for their part, assist the board and prepare decisions for all the other banks.
If the bank can be resolved without recourse to the resolution fund, for example via the “bail in” process, or under a certain threshold, then it is up to the board in executive session - i.e. its executive director, its four full-time appointed members and the national resolution authorities involved - to take a decision that would enter into force within 24 hours. If there is no consensus, the decision will be adopted by simple majority. In the event of equality, the executive director would have the casting vote.
In the event of there being a need to resort to the resolution fund above a certain threshold (20% of the capital paid into the fund or other forms of support such as bank recapitalisations exceeding 10% of funds, as well as all decisions requiring access to the fund once a total of €5 billion has been used in a given calendar year), then the decision is taken in plenary session by a two-third majority of the board members representing at least 50% of contributions.
Voting by simple majority, the plenary session would also have the right to oppose decisions by the executive session authorising the fund to borrow, and decisions on the mutualisation of financing arrangements between both SRM-participating and non-participating EU countries. The veto would, moreover, be impossible.
It should be noted that the SRM would not be able to make it an obligation for member states to provide public support for a bank. Also, if the resolution involves state aid, the Commission should give its go-ahead before the resolution board adopts the decision.
Once that stage passed, the decision by the resolution board would then be forwarded to the Commission, that can choose to forward it to Council in silence, and it would then be adopted by silent procedure. The importance of the Commission's role at this point is to ensure that the resolution plan complies with the fundamental principles of the internal market and is in the common interest.
The Council may reject (by simple majority) or call for amendments to a decision on the basis of a Commission recommendation. The resolution scheme is then applied by the national authorities.
Ex-post simplification? “We keep room for simplification”, assured Commissioner Barnier, who considered that there were “some key points where we can make progress to simplify the system”. The Lithuanian minister was in complete agreement, saying it was important to already have a negotiation base with the European Parliament. Barnier, moreover, said that the complexity of the system had already been reduced in the last hours of negotiation.
In a press release, the vice-president of the EPP Group at the European Parliament, Corien Wortmann-Kool, sounded a note of caution against the weakening of the system by the Council, saying: “We need one effective and single mechanism to resolve failing banks in Europe in an equal way, independent from the member state in which they are located”. She also pointed out that the Parliament was a co-legislator and should be a part of all negotiations, including on the architecture and the governance of the single fund. The Parliament president reiterated, moreover, that he wished to see the Commission responsible for decision-making on the fate of a failing bank.
Safety net. There is also agreement in principle on the safety net to the fund (see EUROPE 10987). A financing “bridge” will be possible during the ten-year transitional period, from national sources (supported by bank payments) or under the European stability mechanism (ESM) according to procedures agreed. A common “backstop” will be developed during that period, to facilitate the single resolution fund loan. For now, the text is no clearer. On this matter, the European Parliament again takes a position against and would like to see the ESM able to support the resolution fund by serving as “insurer of last resort” for it. The provisions must also be “fiscally neutral” so as not to weigh on the taxpayers. The possibility of loans between national compartments has still to be fleshed out.
A “historic” agreement. If all the provisions taken over recent months had existed earlier, it would be three and not 30 banks that would be needing assistance, an EU source said, adding that the aid provided for banks since the beginning of the crisis accounted for between 11% and 14% of European GDP. The French minister for the economy, Pierre Moscovici, spoke of an agreement of “historic” significance, while his German counterpart welcomed the fact that the “last pillar of banking union has been built”. Some hope, however, to see the birth of a single deposit guarantee fund one day.
Still work to be done. Although each co-legislator reached a common position (the Parliament's economic committee adopted this on Tuesday), this is not the “last stage”, the Lithuanian minister pointed out. The European Parliament could prove difficult to convince, when the last plenary session is in April 2014 before the European elections. The Greek Presidency will therefore have just a little over three months in which to bring positions closer. “Both parties should show proof of flexibility in order to reach an agreement by Easter”, Barnier said, calling on them to show a sense of responsibility. “We cannot allow ourselves to fail. Citizens would never forgive us if another crisis were to hit us unprepared”, he added. (EL/transl.jl)