October 8, 2013 11:43 am

Setback for Brussels as lawyers warn on banking union plans

European Union flags are seen outside the European Commission headquarters©Reuters

Brussels’ blueprint for European banking union has suffered a serious setback after the legal adviser to EU finance ministers concluded the proposed manner of centralising some powers to shut banks breached the law.

At the heart of the proposal for a “single resolution mechanism” is a powerful board, which would prepare any decision to wind up an ailing bank and submit it to the European Commission for a final confirmation.

The opinion from the Council Legal Service takes issue with some important powers vested in this board – such as raising money for the central resolution fund – that are not explicitly approved by an EU institution such as the Commission.

These legal arguments over delegation of powers to EU agencies are a significant constraint on policy makers seeking ways to create a central authority without having to embark on a cumbersome treaty change process, which would take years.

“The legal service considers that the powers which would be conferred by the proposal on the board . . . need to be further detailed in order to exclude that a wide margin of discretion is entrusted to the board,” the opinion circulated on Monday states.

While the legal service in September broadly upheld the foundations of the Commission proposal and rejected Germany’s arguments over the need for treaty change, its concerns about how precisely the powers are deployed will seriously complicate negotiations.

While the legal service’s opinion is non-binding, its views can be decisive in debates. Most notable are its concerns over the creation and deployment of a joint resolution fund, particularly in the transition period when the pot is short of its €55bn target level.

Such fundamental legal questions hanging over the proposal will add to fears that the eurozone will fail to agree terms on a central resolution system before the end of the year, throwing Brussels’ banking union plans into disarray.

In a paragraph that will be important for the Commission, it adds that these powers can be exercised as long as “the legislator decides to involve in the exercise of those powers an institution of the EU vested with executive powers”.

This suggests that the concerns can be overcome with a greater role for the Commission. However the solution may be unacceptable to member states, which have already voiced deep concerns about centralising these powers in Brussels.

The specific measures that are found to be in violation of EU law include the board’s remit to oversee banks establishing resolution plans, which would include setting minimum requirements for debt that can absorb losses.

Other areas of over-reach include the board’s primary powers to raise funds for the single resolution fund. This includes its ability to set the framework for a levy on banks, borrow from the market, invest funds or deploy the money during a resolution.

Specifically, the lawyers note “a risk that the framework [for the use of the fund] established by the Commission would be an empty shell that would leave a wide margin of discretion to the board”.

Finally, the legal service argues that the board should not be able to determine the level of fines or penalty payments imposed on national authorities to ensure that its decisions are respected.

As there are no clear guidelines on fines, the service concludes there is “a risk that those guidelines, even if they are not legally binding, would set the punitive policy of the Union in the field of resolution”.

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