30th Jun 2022


EU bank resolution, Schleswig-Holstein, and how to make sense of it

  • Abandoned construction work on Anglo-Irish bank HQ (Photo: infomatique)

“Only three people ... ever really understood the Schleswig-Holstein business - the Prince Consort, who is dead, a German professor, who has gone mad, and I, who have forgotten all about it."

At least, that is what the then British Prime Minister Lord Palmerston is reported to have said on the fate of two duchies fought over by Denmark and Germany in the mid-19th century.

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He could have been talking about the EU's banking union.

The deal between finance ministers brokered late on Wednesday night (18 December) is a classic euro-compromise - messy and almost unintelligible to all but a handful of battle-hardened eurocrats.

But it also represents progress that few would have thought was possible even a few months ago.

Governments have agreed on a common regime to wind-up insolvent banks and how to pay for it.

Meanwhile, Germany has agreed to a single resolution fund. The fund will also be able to access the European Stability Mechanism - the eurozone's €500 billion bailout fund - as a loan facility.

From a starting point of having one draft EU regulation in front of them, ministers ended by agreeing to three additional documents: an intergovernmental treaty on the use of a single resolution fund and its terms of reference, a declaration on backstops, in case the fund runs out of money, and a declaration on the voting rules when they decide on a bank resolution case.

It is a good-sized pile of paper, even by the EU's standards, and it contains a string of new words to enter the EU lexicon.

Lithuanian finance minister Rimantas Sadzius, who brokered the talks, was candid enough to confirm what everybody has been thinking.

"These regulations are as complicated as today's financial world is," he told reporters.

The question is what does it all mean?

For one, banks will in future provide the money to pay for the closure of failed fellow lenders.

Around €55 billion to be paid into a single resolution fund over a 10-year period through national levies. The rules will apply to all 17 (soon to be 18) eurozone countries and other countries who want to sign up to the regime.

Meanwhile, a new "resolution board" composed of a director, four appointed members and the representatives of national resolution authorities, will be created to assess what to do when a bank is in danger of insolvency.

The decision-making process looks particularly cumbersome.

The European Central Bank (ECB) will start the process by saying that a bank is insolvent; the resolution board will make a recommendation to the European Commission; the commission can either say nothing and accept it "by silence procedure" or table amendments.

EU ministers will finally decide what to actually do. If ministers cannot agree by unanimity, then a two thirds majority is needed.

Simple enough?

Bleary-eyed officials on Thursday morning were suggesting that the process could involve up to 200 people - hardly a recipe for an EU response fast enough to meet the demands of financial markets, which never sleep and which show no mercy for political dithering.

In fact, the new mechanism is exactly what ECB boss Mario Draghi did not want.

"We can't have hundreds of people debating whether a bank is viable or not," he told MEPs at the start of the week.

The commission's role has also been significantly cut back.

The original idea was for the EU executive to be the resolution authority, but now it can merely accept the board's ideas or table amendments to its recommendations.

A commission official conceded that the EU executive's role had reduced to "a filter."

He added, that given the sensitivity of the dossier, the commission will "gladly" play a smaller role in the process, however.

Meanwhile, the agreement by ministers is by no means the end of the road.

Negotiations will now start with MEPs in a process that Parliament President Martin Schulz says "will be long, difficult and complicated."

It is no understatement to say that the ministers' agreement is miles apart from the mandate agreed by MEPs on the economic affairs committee on Tuesday.

Deputies want the commission to act as the resolution authority tasked with the official decision to initiate a resolution, leaving the board to decide on the details for its execution.

They want the resolution fund to be able to raise loans from a “European public instrument," including monies from the European Stability Mechanism or the EU budget.

They also oppose being shut out of decision-making through yet another intergovernmental treaty.

But with less than six months to go before next year's European elections, MEPs do not have much room to manoeuvre.

Germany leads a group of countries that could, ultimately, quite happily live without a single resolution regime, and MEPs will also be anxious to avoid the charge of holding a deal to ransom.

With further movement on the fund highly unlikely from ministers, MEPs' best bet in the upcoming "trialogues" will probably be to tighten the decision making process and to beef up the commission's role a little bit.

A single, bank-funded kitty and a single rule book for winding up failed banks will undoubtedly improve the preparedness of EU governments to deal with future crises.

But a note of realism is needed.

The sum - €55 billion - sounds like (and is) a lot of money. But it would be a drop in the bucket if the EU banking sector faced another real bank crunch.

At the height of the financial crisis in 2008, the UK government bought £76 billion (€90 billion) worth of shares to prevent Royal Bank of Scotland and Lloyd's from going bust. At the final count, the UK taxpayer was on the hook for £850 billion (€1 trillion) in loans, guarantees and insurance to its banking sector.

The UK was not alone.

Figures published by Eurostat at the start of 2013 estimated that German and Irish taxpayers were liable for €40 billion and €41 billion, respectively.

EU leaders eagerly lined up to herald the deal as an "unprecedented" and "revolutionary" step towards breaking the link between banks and sovereigns.

But the reality is that it would offer scant protection against another 2008-style bank crash.

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