EUROPE is today publishing a special report on Banking Union - the day that the European Parliament carves the draft regulation on the single resolution mechanism (SRM) in stone. EUROPE's special report retraces, as never before, the marathon 16-hour negotiations that took place during the night of Wednesday 19 to Thursday 20 March, resulting in a political agreement on the SRM. Our report highlights the pivotal role played in these negotiations by the president of the Eurogroup, Jeroen Dijsselbloem. It also explains the connection between the supervision and resolution sections of Banking Union in a one-page 'SRM for dummies'. The report can be read in any order. (Report compiled by Mathieu Bion)
Getting Banking Union up and running in the eurozone. That is the biggest challenge since the creation of the single currency, as Internal Market Commissioner Michel Barnier often points out. The objective is certainly ambitious - to begin federalising the work of supervision and resolution in banking, tackling the fragmentation of bank lending rates along national borders and breaking the vicious circle of bank problems resulting in excess public debt.
From November 2014 onwards, the European Central Bank (ECB) will have the job of being the direct supervisory body for 130 eurozone systemic banks once it has completed its asset quality reviews of the banks in question. On 1 January 2015, the bank resolution mechanism (SRM) will come on stream with the objective of organising and contributing to the financing of the winding up of banks while making the least possible recourse to public money. In 2016, it will include a bank resolution fund (SRF), with an estimated intervention capacity of €55 billion provided by the banking sector, which will be fully mutualised after an eight-year build-up period.
After starting work on Banking Union in June 2012 in reaction the boomeranging sovereign debt crisis, the European summit has kept up the pressure to ensure that the draft legislation for the supervision and resolution arms of Banking Union is adopted at European level before the end of the current European Parliament. In this way, Europe's leaders are trying to avoid any hiccoughs due to the expected rise in Eurosceptic forces in the European elections next month. Mission accomplished. They will achieve their goal when the European Parliament (EP) enshrines the legislation on Tuesday 15 April.
The legislative process leading to the creation of Banking Union has not mobilised the masses, to put it mildly. Despite the obvious political importance of Banking Union for the European construction project, the negotiations over the bank supervision mechanism (SSM) and the bank resolution mechanism have remained confined to circles of experts from the upper ranks of diplomacy, finance and the media. The main institutions involved have been the two co-legislators, the Council of EU member states and the EP, with the European Commission acting as facilitator. As an unavoidable link in Banking Union chain, the ECB shared its recommendations without directly taking part in the negotiations.
The 16 hours of work that led up to agreement in principle being reached in the small hours of Thursday 20 March on the SRM deserve special attention. Going by the term 'trilogue' in Brussels-speak, these interinstitutional negotiating meetings shed light on the balance of power between the European institutions. Centre stage in all this, in the view of many negotiators, was the rise of an unchallenged and unchallengeable leader of Europe: the head of the Eurogroup, Jeroen Dijsselbloem.
Forceps delivery for the bank resolution mechanism
Agreement in principle was crucial by the end of March if the legislative process to set up the bank resolution mechanism were to be completed before the full campaigning started at the EP. Failing to agree on the resolution side of Banking Union carried the risk of putting increased pressure on work on the supervision side, which is currently in progress, as the ECB and the European Banking Authority(EBA) concentrating on their assessment of the strength of the eurozone bank sector.
The SRM will not be in the front line at the end of 2014 when the weak links in the chain of eurozone banks become known. It will be the job of the member states or, as a last resort, the eurozone's bailout fund (the European Stability Mechanism, ESM) to intervene to enable the banks in question to meet the required solvency ratios if the market is unable to provide all the necessary capital itself. But the absence of the SRM would have been very damaging to the credibility of the system planned by the eurozone to sweep away the cobwebs from an industry responsible for 75% of financing within the European Union.
At the start of the last scheduled trilogue meeting, the positions of the Council of Ministers and the EP were still poles apart. Each institution decided on its negotiating position in December, but three months went by without any real progress being made. After a dozen fruitless trilogue meetings, MEPs felt the member states had been operating a stubborn scorched earth policy. The member states refused to consider any opening and refused to give the Greek Presidency of the Council of the EU any leeway in the talks it was chairing for them.
At the penultimate trilogue talks in Strasbourg on Thursday 14 March, Greek finance minister Yiannis Stournaras came to the MEPs with a change in his negotiating mandate for the very first time, but without the usual document translating into legal language the provisions over which the Council was prepared to budge! Understandably, the European Parliament felt exasperated.
Only blind optimists believe a positive outcome is possible
In the morning of Wednesday 19 March, the EP negotiators were preparing for war. As they constantly pointed out in committee meetings or on Twitter, it's better to fail to reach agreement than to strike a bad agreement. If the negotiations with the member states cannot be dragged out of deadlock, then the EP will complete its first reading of the draft legislation in April, in the worst case scenario endorsing the SRM based on the Community Method, which they feel is more effective and credible than the partly intergovernmental method defended by the Council. It would then be the job of the new EP to take up the question again at the point where the negotiations had left it.
Many doubted the likelihood of agreement being reached that day as there were so many issues that needed to be settled. One of the EP negotiators, Sven Giegold (Greens/EFA, Germany), even said at a telephone press conference: “I am not expecting agreement today”.
Before entering the arena, Barnier and Dijsselbloem examine thoroughly the situation. From 12: 00 to 13: 30, they have lunch together in private in a salon on the thirteenth floor of the Berlaymont, the European Commission's headquarters in Brussels. The commissioner gave the head of the Eurogroup some indications that could enable an acceptable solution to be found to the SRM question. Then the Greek and Dutch ministers touch base in the Council building opposite before going to the EP. Beforehand, the head of the Eurogroup had been in direct contact with a number of MEPs.
A rumour was circulating that if no agreement were found, the president of the EP, Martin Schulz of Germany, was prepared to defy the other leaders and take the issue to the summit the following day where the EU28 heads of state were to discuss how Europe was to respond to the crisis in Ukraine.
15: 00 hrs. Doors to room ASP 5G3, the theatre of negotiations, are closed after some 60 politicians, diplomats and experts enter, walking past a handful of agency and business reporters trying to get them to make some comment. The only way to contact the negotiators is via text messages. No reporter will sit outside all night.
The talks almost collapse after the first few minutes. A parliamentary source explains: “Dijsselbloem started by making a little speech in which he called on the Parliament to be realistic and accept the Council's position. We all looked at each other, thinking it was a joke and the trilogue would be over in just 15 minutes.” At that very moment, another source explains: “We had an object lesson in the Council's methods of a mixture of pressure and machismo.”
A first sounding of participants from 14: 30 to 14: 30 confirms the main stumbling blocks. The EP is critical of the procedure for endorsing the bank resolution plans that the Council recommends, finding it over-complex and too permeable to political interference. Standing firm behind the Community Method, they reject as a matter of principle the member states' desire to set up the future bank resolution fund on an intergovernmental agreement basis (over which the EP has no influence). It is Germany that forced the intergovernmental approach on the Council, with a 10-year transition phase at the end of which the fund would have reached its full capacity of €55 billion (financed solely by the banks) and would be fully mutualised.
At the Commission, a clear change in attitude is noticed in the two institutions compared with their usual stance. A European official explains: “The negotiations began the other way round, with a Parliament that was very firm but not closed and a Council personified by Dijsselbloem who was making approaches to them. But in all the previous trilogues, it was the other way round. So at the Commission, we started to support the Council more, although before, we didn't support them at all because we didn't agree with their position.”
At the end of the afternoon, agreement was reached on the first sensitive issue. The ECB will be the main body responsible for identifying when a bank is failing or likely to fail. But the resolution board (of representatives of national bank resolution bodies) will also have its say if the ECB fails to act. The member states wanted the ECB and resolution board to be on an equal footing, but the EP wanted a “true hierarchy” and “that's exactly what we've got”, comments an EP source with delight.
Every time agreement seems to have been reached on a controversial point, it is put to one side while all the other legislative aspects are negotiated. In the Brussels' bubble, the usual rule is that there is agreement on nothing until there is agreement on everything! Especially here, where the most important aspects of the SRM are to be negotiated last. Dijsselbloem had warned MEPs at the outset that mutualisation of the SRF would be the very last question to be discussed.
20: 00 hrs. Tension rises. As each side repeats their well-known negotiating positions for the umpteenth time, Dijsselbloem feels that the talks are going in circles. He takes a blunt line with the MEPs: Do you really want agreement to be reached tonight? Every time the Council offers something, would you please accept it rather than constantly demanding more! “Otherwise, I'm going home.”
Dijsselbloem will up the pressure on the MEPs twice in total. Sign of exasperation or a negotiating tactic? The Dutch say his attitude had a real impact on MEPs. A Dutch diplomat commented: “It worked rather well. It seemed to have made a mark on Mrs Ferreira”, the Portuguese Socialist who was piloting the talks for the European Parliament.
An EP expert takes a more moderate view: “We at the EP wanted an agreement, but we weren't prepared to accept everything the Council demanded. The hikes in tension came from Dijsselbloem, who didn't expect the Parliament to stick to its position so firmly, so he sent the Commission to us a number of times to ask us to be realistic.”
Midnight (night of Wednesday 19 to Thursday 20 March). After two full round-the-table soundings on the outstanding issues, several informal drafting sessions in small groups or everyone combined and interruptions for internal talks, talks start to move in a positive direction. The negotiating parties roll up their sleeves and tackle the issues head-on. Hopes rise that political agreement may be possible after all.
The sequence of events for mobilising money from the SRF is now clear. The SRF national compartment of the country in question, which will comprise solely contributions from the banks of that country, will intervene first. Then the mutualised (pooled) part of the SRF, with the option of national compartments lending to each other and the option of the SRF borrowing money from the market and then, finally, new contributions from banks as necessary. Flexibility is introduced in the sequence of the last two links in the chain.
Based on technical documents from the Commission on the question of securitisation, the EP falls in line with the Council idea that, if the SRF borrows from the markets before being fully operational, it will bring as guarantees the €55 billion that banks are expected to provide to the common pot. The Council refuses to let the SRF be given public guarantees by the member states because of the impact that would have on member states' debt.
The European Parliament makes three concessions
Five crucial aspects of the SRM remain to be settled: (a) choice of the European institution that will rubberstamp the resolution plans drawn up by the resolution board; (b) the division of decision-making powers between the board's full sitting and executive sitting; (c) the principle of using an intergovernmental agreement to set up part of the SRF; (d) the speed for setting up and mutualising the fund; and (e) the methodology to be used to work out individual banks' contributions to the SRF.
MEPs accept the inevitable - in the first few years, the bank resolution fund will exist outside the Community framework. Since December, the member states have been meeting in the framework of an intergovernmental conference to draw up the SRF treaty under the aegis of the Netherlands. MEPs reject this approach as a matter of principle, but attend the drafting of the treaty as observers. A parliamentary assistant admits: “The intergovernmental agreement is the area where the EP had to climb down the most.”
Who is to have their finger on the button? The European Parliament demonstrates flexibility on two further issues. The first concession is in response to the question Commissioner Barnier keeps asking: “Who has their finger on the button?” The ALDE liberal group, the one most keen on this question, agrees to let the Council have a role with certain restrictions. In general, the European Commission will be responsible for rubberstamping the resolution plans drawn up by the resolution board, but if the Commission believes the SRF should make a greater contribution to the cost of winding up a failing bank, then European finance ministers will be able to issue an objection and ask the resolution board to change the resolution plan.
As demanded by the EP, the approvals procedure for resolution plans should be subject to as little political horse-trading as possible in order to ensure equal treatment irrespective of the banks' country of origin, and it should not last any longer than a weekend (between the closure of the markets in the United States on Friday night and the opening of the markets in Asia the following Monday morning). This is adjusted so that the Commission and Council will each have 12 hours in which to issue an objection to the resolution plan.
Another important concession by the EP is the procedure for deciding how much each bank must pay into the SRF. A source explains: “We spent ages on the question of contributions to the fund.” “Three hours”, according to Barnier.
Giegold is the most vocal of the MEPs on this issue, a real hot potato in France, which fears that its universal banks will have to pay more than their fair share. Giegold calls for the EP to be given true scrutiny over the calculation methodology for the bank sector's contributions to the fund. “We didn't win much”, he admitted after the talks. The implementing legislation for the methodology that the Commission will unveil in 2014 will remain in the hands of the member states alone. Giegold believes all the same that the EP will be able to “hijack” the legislation because it is connected with another implementing measure arising from the BRRD directive to harmonise national resolution schemes throughout the EU, where MEPs have genuine powers of scrutiny.
Having made these two concessions, the EP turns to the Council - it's your turn now. It wants the two ministers to put their cards on the table for the question of internal governance of the resolution board and the speed at which the SRF is to be mutualised. “I don't have a negotiating mandate for making concessions”, says Dijsselbloem. The MEPs respond that the EP has gone more than half-way and its concessions are conditional upon concessions being made by the member states.
“At this point, Corien Wortmann-Kool took a very hard line. She said: 'This isn't how negotiations are done. If you carry on like this, there's no point continuing'”. Several participants commented on the Dutch MEP's key role at this point in the talks and how she, the representative of the Christian-Democrat EPP, the most influential party in the EP, stood her ground against the Dutch finance minister. Was this a sparring match between a Christian Democrat and a Socialist from the same country? “I don't think it's a matter of nationality”, but rather a desire to keep the negotiating team at the EP united, explained one of them, adding: “Aware that in her group, there's the CDU of Germany that didn't agree with her position at all, Mrs Wortmann-Kool managed to retain a resolutely European approach”.
4: 30-5: 00 hrs. The head of the Eurogroup takes stock. He consults his Greek colleague and asks for a break in the talks so he can phone Pierre and Wolfgang. Dijsselbloem and Stournaras move out of earshot. They wake up the German and French finance ministers at dawn, Wolfgang Schäuble and Pierre Moscovici, to brief them on the state of play after 14 hours of negotiations. The German minister wants details of the talks on the SRF's lending capacity. He needs to be won over about the need for the Council to make a concession about speeding up the process of mutualising the SRF. The French minister is told about the compromise on bank contributions to the fund, for which Paris has drawn as a line in the sand.
A source says that other telephone calls took place too - with the finance ministers of Finland and Luxembourg, but we've been unable to confirm this.
An expert says: “Dijsselbloem put his credibility with his colleagues on the line by telling them: 'This is reasonable. On this basis, we can have an agreement. If you refuse, then Yiannis and I will return and say 'no.' That would mean we would have to carry on with the talks next week, but that's ridiculous given how far we've got now.' He won the support of his colleagues and I imagine he also got a new negotiating mandate for the last two issues.”
The head of the Eurogroup puts his cards on the table
6: 30 hrs. The break in the talks lasts for an hour and a half. Perfectionists knuckle down to the task of fine-tuning the legislation. Some stretch their legs, grab a bite to eat or nod off for a while. There's a raid on the last few small bottles of mineral water that are so popular at the European Parliament.
The two ministers return to the arena. Dijsselbloem addresses the meeting: “I've got flexibility from the ministers. Take it or leave it.” After the talks, many observers praise the Dutch Socialist for his negotiating skills and brinkmanship. “Dijsselbloem clearly went beyond his mandate”, explains a source at the Commission. But in the view of a Dutch diplomat, the political leaders have room to manoeuvre that is not available for technical experts, who have to stick to a strict negotiating mandate and this “bold but honest” approach by the head of the Eurogroup was “welcomed” by the EP.
An EP official remembers the scared look on the face of a Greek Presidency expert as the head of the Eurogroup placed his cards on the table. “The Germans! The Germans!” she is said to have muttered.
Leaving less room for political horse-trading in the decision-making process. For governance of the resolution board, the board's plenary sitting will have the power to endorse a resolution plan for a failed bank when more than €5 billion is to be provided by the SRF. Likewise for when the SRF has paid out more than €5 billion over the 12 months. “This €5 billion was highly supported by some member states”, explains a Commission source, referring to Germany. But “Dijsselbloem turned internal governance of the board arse-about-elbow compared with the Council's position”, while retaining the €5 billion threshold.
The genuinely new measure that the head of the Eurogroup came up with was the differentiation between aid in the form of cash and aid in the form of capital. “The €5 billion can be liquidity, capital or a mixture of the two. For calculating the €5 billion, there are different weightings: for capital it's 100%, but liquidity is valued at 50%”, explains the parliamentary assistant. In other words, if the SRF only finances liquidity, it can provide a failing bank with up to €10 billion.
This differentiated treatment was in fact suggested by the Commission based on a Finnish proposal previously rejected by Germany at the ECOFIN Council. It is justified by the fact that beneficiaries pay cash back faster than capital, which is a longer-term investment. This is a compromise. At the beginning, the EP didn't want to accept the €5 billion cap, wanting the board to have decision-making powers in all circumstances. Faced with the fact that the Council refused to budge, the MEPs went along with the idea, but wanted the granting of cash not to be taken into account. As so often, the question was split down the middle: €2 of aid from the SRF in the form of cash will be counted as €1.
Resolution fund to be more quickly mutualised. For the resolution fund, MEPs wanted to get their money's worth from the Dutch minister. They would go along with a rather slow process of setting up the SRF as long as it was mutualised very fast (half in the first 3 years and then 25% in each of the last two years).
Dijsselbloem offered the following: the SRF will be fully constituted after 8 years on a linear basis, as stated in the Council's revised mandate for the Greek Presidency. As a major concession, mutualisation will be brought forward reaching 40% in 2016 and then increasing by 10% in each of the remaining years.
The MEPs want more and win a 20% mutualisation for the second year. Dijsselbloem agreed to this “very quickly” explains a European official. Some people at the EP feel that the head of the Eurogroup has greater room for manoeuvre than he let on and MEPs should fight for bigger concessions. Others think that the time has come to compromise because of the huge distance covered by the Council in “only” 16 hours.
“When you look at the list and have to put red or green crosses, you see there are more red crosses than green, but when you look at it in terms of positioning, it is incredible how much the Council moved in our direction”, said a source at the EP.
At the Commission, people are “hugely impressed” by the Council's work. An official comments: “I was greatly concerned before that evening because in the event of failure, an ECOFIN Council would have to have been convened the following week and that would leave so little time for the resolution mechanism to be adopted at the April plenary”. The official adds: “Dijsselbloem's strength is that he took the bull by the horns. He understood that agreement could not be reached in line with the negotiating framework given by the Council, and having the courage to solve this in an intelligent, ring-fenced and substantial manner. And then he managed to get the important ministers to endorse his audacity.”
7: 00 hrs. After 16 hours of talks minus 30 minutes of pause, the representatives of the two co-legislative European institutions understand in the morning of Thursday 20 March that broad agreement is about to be reached. It is decided not to tell the outside world until the deal has been endorsed by the EP's political groups. The only journalist present when the ministers emerge from the meeting, a reporter from the Financial Times, tweets his fury at the fact the negotiators refuse to comment.
A new day begins. The end of the political trilogue sees the start of a technical trilogue on the SRM in order to get down to the fine-tuning of the legal document. If one includes the preparatory meetings before the trilogue talks and the technical discussions afterwards, then some EP experts haven't slept in more than 30 hours. Some MEPs enter new trilogue talks, this time about retail banking. Dijsselbloem drives back to the Netherlands. He will stay there for a few hours before going to the Dutch finance ministry in The Hague. Stournaras flies off to Athens for a meeting with the troïka of lenders (European Commission, European Central Bank and International Monetary Fund) that are demanding new measures from Greece in return for a new tranche of international aid.
11: 00 hrs. The European Parliament's negotiating team holds a press conference. Mrs Ferreira announces: “We have broad agreement on the SRM that is a major improvement on the Council's position in December”. Europe's elite breathes a sigh of relief.
THE INVOLVEMENT OF THE HEAD OF THE EUROGROUP
MAKES ALL THE DIFFERENCE
The final inter-institutional negotiating session on the bank resolution mechanism (SRM) had many unusual ingredients compared with other trilogue talks of this nature, which MEP Sven Giegold (Greens/EFA, Germany) described as veritable “democratic black holes”.
The first ingredient is duration. An EP expert explains: “I've done quite a few trilogues - on the energy package, financial supervision and the two reviews of the Stability and Growth Pact - but this one was the most demanding, both mentally and physically”.
The second ingredient is that of sheer density. “There were so many things to sort out that night”, explained MEP Corien Wortmann-Kool (EPP, the Netherlands). In fact, everything was negotiated in a single night because the member states had refused to budge for three months.
The third ingredient - and by far the most important - is that for the first time, a head of the Eurogroup sat at the negotiating table. The idea was mooted by Greek finance minister Yiannis Stournaras, the acting president of the ECOFIN Council, who suggested it to the Dutch minister at the March ECOFIN Council, who readily agreed. A Greek diplomat explained that, when he participated in the trilogue talks, Dijsselbloem was the president of the intergovernmental conference responsible for drawing up the treaty, rather than the head of the Eurogroup.
Road-tested in Strasbourg at the penultimate trilogue talks, the two-man approach makes sense because the SRM will be based on two pieces of legalisation, a draft regulation negotiated by the Council of Ministers and the EP (on an equal footing; and an intergovernmental treaty on which the resolution fund (SRF) will be partially based and which is to be ratified by the 18 countries in the eurozone (Lithuania will ratify it in 2015).
The Netherlands has been given the job of piloting the drafting of the intergovernmental treaty. All 28 member states attended the intergovernmental talks, as did the EP as an observer. It was Germany that insisted on the intergovernmental approach that only convinced a handful of other countries. MEPs have always rejected the idea, but finally accepted it in order to make an overall agreement possible.
Taking matters in hand
It has to be said that at the recent trilogue talks, the head of the Eurogroup took things in hand. “It's true, Dijsselbloem is more of a driving force”, explained a Dutch diplomat. By daring to go far beyond the Council's negotiating mandate, he was able to present concessions to the MEPs on key measures where the member states were prepared to show flexibility in order to make broad agreement possible. For example, he opened the door to internal governance of the resolution board that is less subject to political interference, although this measure is part of the regulation that is under the responsibility of the Greek Presidency.
The Commission points out, however, that Dijsselbloem didn't come up with anything that contradicted Stournaras' position. And in the view of a number of participants, Dijsselbloem and his team always relied on the Greek Presidency's technical expertise. EP sources explain: “He didn't sweep the Presidency to one side”, but he knew the subject matter better than his Greek counterpart.
This piloting of the question by Dijsselbloem was facilitated by the fact that the Greek Presidency had to be careful where it trod. “There was an elephant in the room: Wolfgang Schäuble was not here. The Greek Presidency had to defend the Council's position even though it was not in its own interest”, comments Sven Giegold. In a similar vein, another EP source talks of the “uncomfortable position” of a Council Presidency being “deliberately over-cautious” and forced to defend “a position it didn't see eye-to-eye with”.
The need for a stable Eurogroup presidency. Doesn't the head of the Eurogroup's positive impact on the talks on such a key issue for the future of the eurozone set a precedent that would justify a stable presidency for this job, as demanded by France and Germany? The EU treaty would not need to be changed to set up such a job and it could happen in the autumn when the new heads of the European Council, Commission and EP are appointed.
The Netherlands fears the addition of another layer of bureaucracy and doesn't back the idea. “You need a political diplomat who understands the ministers and is able to defend results in order to get re-elected and for that you don't need a permanent presidency”, explains the Dutch diplomat.
The Commission takes a different view. “This is a strong argument for a European economy and finance minister. Someone who is both Rehn (Ed: Economic and Monetary Affairs), half of Barnier (Financial Services), half of Semeta (Taxation) and Dijsselbloem… and perhaps a bit of Lewandowski (Budget) thrown in. This is the idea defended by Schäuble. And this person would have total control over the European Stability Mechanism.”
Following the hiccoughs in the Cypriot bailout, gratuitous jibes at his predecessor and despite his clearly demonstrated preference for making the Dutch parliament his main referent, it cannot be denied that Dijsselbloem scored goals by taking such an active part in the Banking Union talks.
A number of commentators were lavish with their praise for his commitment to the job for the past 18 months and his involvement in the final trilogue on the SRM. “In ten months as head of the Eurogroup, Dijsselbloem has done more than Juncker did in ten years. He put his foot in it at the beginning when he said: 'The only parliament I'm accountable to is the Dutch parliament'. But this time, the head of the Eurogroup acknowledged the role of the European Parliament”, explained an EP expert. Similar comments were made by a senior official of the European Commission: “For several months now, Dijsselbloem has taken on a new dimension. He is probably the strongest man on the ECOFIN Council. He doesn't hesitate to confront the Germans when necessary (…) You have to have guts to do what he did. That indicates a feel for the European interest.”
BANKING UNION FOR DUMMIES (AND OTHERS)
Banking Union in the eurozone will be two-pronged in the short-term, comprising supervision and resolution. Some feel that Banking Union cannot be fully complete until a common deposit (savings) guarantee has been set up. The project has two aims - restoring confidence in the 6,000 banks in question in order to tackle the current fragmentation of the market and break the automatic link between bank problems and excessive public debt. The question of changing the treaty to give Banking Union a stronger legal basis has been raised during the legislative process. Eighteen countries (19 when Lithuania joins the eurozone in 2015) will be required to join Banking Union, but non-euro member states may also participate if they wish.
SSM. The European Central Bank (ECB) has been given a key role the bank supervision mechanism (SSM). From November 2014 onwards, the ECB will directly supervise nearly 130 big eurozone banks (the 'too-big-to-fails' with assets of over €30 billion or making up over 20% of the host country's GDP) once it has completed an asset quality review for the banks in question. The remainder of the eurozone banking sector, comprising 15% of total bank assets, will continue to be supervised at national level, with bank supervision bodies applying a common raft of prudential bank rules. The ECB will have the 'right of evocation' whereby it can decide to directly supervise any bank that undermines financial stability.
In order to hive off monetary policy from bank supervision, the ECB has set up a bank supervisory board comprising representatives of national bank supervisory bodies, currently chaired by Danielle Nouy (of France).
The board's decisions must be rubberstamped by the ECB's Governing Council or be renegotiated. Detailed measures have been laid down to enable non-euro countries that are part of Banking Union to be treated on an equal footing with eurozone countries. Non-euro countries will have the right to withdraw if the Governing Council objects to a draft decision by the supervisory board.
SRM. Participation in the bank resolution mechanism (SRM) that will be set up in 2015 is compulsory for all countries involved in the SSM. A Brussels-based bank resolution board will be set up, comprising representatives of national resolution authorities.
The European resolution board will prepare resolution plans for cross-border European banks directly supervised by the ECB. It will have the 'right of evocation' over all eurozone banks, even the regional banks that are still supervised nationally. In the event of a bank collapse, it will be for the national supervision authorities to implement the resolution plan in compliance with their own legislation.
A bank resolution fund (SRF) will be set up in 2016, based on an intergovernmental agreement for the first eight years. By 2023, it will have an intervention capacity of €55 billion (1% of the covered deposits) contributed by the banking sector. The banks' contributions will initially go into national compartments at the SRF, which will be gradually mutualised during an eight-year transition period (40% in 2016, a further 20% in 2017 and a further 10% in each of the following years).
To ensure the SRM is credible, the SRF will be able to borrow from the markets. Eurozone countries have pledged to provide a common backstop by 2016, but Germany refuses to countenance the idea of the European Stability Mechanism (ESM), the eurozone's permanent bailout fund, being allowed to backstop the SRF.
The power of identifying failing banks will mainly be in the hands of the ECB. In general, the European Commission will be the EU institution that validates resolution plans drawn up by the resolution board. The Council of Ministers will be allowed to issue an objection to a plan when the Commission increases the suggested amount to be contributed by the SRF. The process of authorising resolution plans must last no longer than 48 hours.
In general, the executive sitting of the resolution committee (only the representatives of the country where the bank in question is based) will endorse resolution plans. The board's plenary sitting will only decide on individual case if the SRF is required to contribute more than €5 billion. For calculating this €5 billion, money for recapitalisation and money for liquidity will have different weightings (recapitalisation has a coefficient of 1 and liquidity a coefficient of 0.5). The plenary sitting will have the power to allow the SRF to borrow from the markets if necessary.
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