On the last Wednesday before Christmas EU Finance Ministers made a significant step forward. They managed to establish the basic structure of the second pillar of the Banking Union, after last year they had established a Single Supervisory Mechanism. Now ministers managed, after laborious discussion, to agree on a time schedule and the most important features of a joint resolution mechanism. The idea behind this is that the “unholy alliance” binding bank debt and government debt together at national level needed to be broken by establishing European mechanisms. In addition, tax payers should be involved in saving failed banks only as a very last resort, in contrast to the present state of affairs, for instance in Austria, but also many other countries. In the future, bank owners and large creditors (beyond 100.000 Euro deposits to be guaranteed) should be responsible for bank resolution. If this is not enough, a joint resolution fund, worth 55 billion Euros, to be fed by banks’ own contribution, will be available – in 2026. While a simple decision mechanism had been proposed by the European Commission last spring, where the Commission would be decisive, ministers established a very laborious procedure which gives home countries an important say in potential resolutions. The Financial Times estimates that in the extreme 27 voting events involved nearly 200 persons will be necessary – not really a lean procedure. And, in addition, it once more gives national ministers a say – which was to be eliminated.
One should realize that if a large bank in Europe needs to be closed because stress and other tests have shown it not to be viable, very little time for that decision is available, namely between Friday night and Sunday morning, while stock exchanges are closed and depositors cannot rush the bank to withdraw their deposits.
Two more significant problems arise. One is that the 55 billion Euro resolution fund (after 2026) is by far too small to backstop larger banks. Germany has nixed access of this fund – or the failing bank – to the European Stability Mechanism, which, after all, can activate up to 1 trillion Euro. And: until the fund is full, the main responsibility and financial backstop will still be the national taxpayer – thus obviating the original (positive) purpose of the Banking Union. While long-term solutions are good, the present state of EU banks with their significant under-capitalization and high share of non-performing loans will make it likely that effective resolution mechanisms might be needed next year, after the ECB and EBA will have conducted their assessments of the 130 largest EU banks.
As an aside: Austrian media and commentators (including yours truly) have noted, with different degrees of sarcasm, that the previous and present Austrian finance ministers have not participated in the last 3 ECOFIN councils – because of coalition negotiations. It has been noted that the German minister participated personally in all these Councils, in spite of a similar domestic schedule. O nationes, o mores!