The European Parliament improves banking union

Thursday the 20th of March might be remembered as the day the European Parliament saved the Banking Union. After a round of negotiation which lasted a full 16 hours, the Parliament and the Council reached a provisional agreement on the proposed Single Resolution Mechanism (SRM) that, together with the Single Supervisory Mechanism (SSM) will constitute its core architecture.

The deal comes after the Parliament had raised fierce criticisms against a previous draft agreed by the Council in December 2013 (whose limits we discussed), and just in time to be approved before the Parliament enters its pre-electoral recess. At first sight, the deal improves considerably on the main shortcomings of the previous agreement, i.e. the complexity of the resolution process and the unsatisfactory deal on the resolution fund.

In terms of the decision process, the procedure has been streamlined and speeded up. As in the previous agreement, the European Central Bank – acting in its supervisory capacity – will be responsible for triggering the resolution process. After this first stage, a resolution scheme (including details on the use of resolution tools and resolution funds) will need to be adopted by the Resolution Board. The preliminary deal reached by the Council in December envisaged a very convoluted process for the adoption of such a scheme, with the risk of sensible delays. The Parliament has succeeded in reducing the lag for taking this decision and in limiting the cases in which the adoption of the resolution scheme will need to be taken by the Board in a plenary session. As a rule, individual resolution decisions will now be taken by the Board in an executive session (8 members) and the plenary session (23 members) will only be required if the use of the Single Resolution Fund exceeds €5 billion. This will considerably limit the number of cases to be dealt with by the Board in plenary, thus making the process more expedite and less prone to political interference.

A second achievement of the Parliament is the speeding up of the mutualisation of resources under the Single Resolution Fund. The original deal – widely criticized on this point – envisaged a Fund with a target level of €55bn. Leaving aside consideration on the appropriateness of the Fund size, a major problem was that the Fund would have initially been structured into national “compartments” to be slowly merged and filled up over a period of 10 years. The new agreement reduces the build-up period to 8 years, but most importantly accelerates the mutualisation process significantly. Under the current deal, 40% of the funds in the national compartments will in fact need to be mutualised already after the first year and another 20% in after the second, while the rest will be spread equally over the next 6 years.

Overall, our assessment is therefore that the current deal on the Single Resolution Fund constitutes an improvement on the shortcomings identified in December. However, the resolution framework is still not perfect and in particular two central issues remain open.

First, the crucial question of the backstop to the Single Resolution Fund is not yet settled. The political agreement reached by the EU leaders includes a commitment to put in place a credit line to back the Fund but neither the nature nor the timing of such backstop are clear. Even if the build-up of the Fund is accelerated, as it has been agreed this morning, a resolution mechanism still absolutely needs some form of public backstop to be fully credible and ensure that confidence is preserved. This issue should therefore be dealt with as soon as possible.

Second, the scope of the SRM must also be made clearer. Today’s press release from the Commission says that “the Board would prepare resolution plans and directly resolve all banks directly supervised by the ECB and for cross-border banks” while “national resolution authorities would prepare resolution plans and resolve banks which only operate nationally and are not subject to full ECB direct supervision, provided that this would not involve any use of the Single Fund.” From this text, it is not clear whether the Board would have a say in the resolution of the second category of institutions mentioned, apart from the cases in which the resolution fund is used. However, a proper Banking Union should have no segmentation between central and national level in the management of resolution function. Moreover, according to the text on supervisory mechanism, the ECB is formally responsible for the supervision of all banks in the euro area and can take over the direct supervision of any banks that it is not directly supervising already, if needed. This should be made possible also in the case of resolution, to avoid a situation in which all banks are equal vis à vis supervision but not vis à vis resolution.

This article was originally published at Bruegel

 http://www.bruegel.org/nc/blog/detail/article/1282-the-european-parliament-improves-banking-union/

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