On Friday 25 May, the European finance ministers reached an agreement by qualified majority on the ‘banking risk reduction’ legislative package. Among other things, the package embeds the TLAC international prudential standard in EU law.
“It’s done: we have an agreement!”, said the president-in-exercise of the Ecofin Council, Vladislav Goranov, following a public debate.
Greece and Italy abstained, the latter due to its lack of government.
In actual fact, a deal had been sealed informally over a dinner the evening before between the French, German and Spanish ministers and an Italian representative. Highlighting the lack of progress in work at European level on the ‘risk-sharing’ plank of Banking Union in the Eurozone, Italy and Spain managed to get the Bulgarian Presidency to make a specific declaration.
As the Bulgarian compromise proposal is not fully satisfactory to anybody, the ministers felt the text was the best possible option, particularly on the question of the subordinated financial instruments that a major bank managing more than €100 billion in assets must mobilise in the event of bank resolution.
The new target for subordinated instruments that can be mobilised in the event of a bail-in will be 8% of the bank’s liabilities. The resolution authority will have some margin to set higher requirements on the basis of the risks to which the groups in question are exposed. These requirements will apply from 2024, but the resolution authority may push this deadline back, on a case-by-case basis.
There is therefore both a single upper and lower limit at the same time, a European source explained, confirming that 17 regional development banks, 14 of which are German, will be exempted from the European prudential rules.
During the debate, several ministers considered that the agreement will increase the solidarity of the European banking sector. “This decision may make the European banking sector the most stable in the world”, said the French minister, Bruno Le Maire. His German counterpart, Olaf Scholz, considered that Banking Union should serve to “protect the taxpayers to the greatest possible extent”, for instance by introducing high thresholds of banking assets that can be mobilised in the event of default.
Other member states, such as Finland, Luxembourg, the Czech Republic, Slovenia and Sweden, warned against any watering-down of the rules during the forthcoming discussions with the European Parliament, for instance on the question of the relationship between the home and host countries of a banking group.
Parliament's committee on economic and monetary affairs may reach its negotiating position with the Council of the EU before the summer.
Risk-sharing. Spain, Greece, Italy and Portugal consider that progress is now needed in the sharing of banking risks, in line with the 2016 roadmap and the completion of Banking Union (see EUROPE 11576).
This agreement is “a victory for those who put risk reduction ahead of risk-sharing”, said the Greek minister, Euclide Tsakalotos.
Goranov told the session that the finance ministers had once again undertaken to continue the work on all elements of the roadmap on Banking Union, including on the sharing of risks. A decision will be made in June 2018 to make the European Stability Mechanism (ESM), the permanent bailout fund of the Eurozone, into the backstop of the Single Resolution Fund (SRF), the financial arm of Banking Union, he said.
On this matter, there are several questions still to be settled: - the level of the line of credit under the ESM dedicated to the SRF, with the Commission proposing €60 billion; - the decision-making process, with Germany calling for the Bundestag to retain a right of scrutiny; - the implementation period, given that the backstop needs to be in place by the end of 2023 at the latest, as this is the date that has been set for the build-up phase of the SRF fund to conclude.
However, Goranov did not explicitly refer to the creation of a European deposit insurance system (EDIS), the third pillar of Banking Union.
The road to the completion of Banking Union remains, therefore, strewn with pitfalls. “There is still a lot more we can do to reduce risks so we can move forward with risk-sharing”, said the Finnish minister, Petteri Orpo.
The day before, following the Eurogroup meeting, Mário Centeno, had said that European institutions would report back on the progress made in reducing risks in the banking sector. “This will give us a clear and objective picture of where we are with risk reduction and that will inform our decisions”, the Eurogroup President said.
There is no doubt in anybody's mind that the question of non-performing loans (NPL), which are still weighing down certain banking sectors in the countries of southern Europe, will remain a subject of considerable controversy (see EUROPE 11981). (Original version in French by Mathieu Bion)