Last updated: March 20, 2014 11:17 am

EU reaches deal on final piece of banking union

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Europe agreed the final piece of its banking union after marathon talks ended on Thursday, with a deal on a common system for handling bank crises that pushed Germany’s red lines on cost sharing.

The breakthrough came after record-breaking 16-hour talks that lasted until 7am, ending a protracted political stand-off between the European Parliament and EU member states that threatened to delay the reforms.

Once formally approved by the parliament, the legislation will establish a single eurozone system to shut failing banks – the Single Resolution Mechanism – and a €55bn shared fund to cover costs, paid for by banks.

While the compromise falls well short of the parliament’s opening position, the MEPs secured terms to ensure the fund is mutualised earlier and somewhat curbed the influence of finance ministers in decisions to close a lender.

MEPs hailed the compromise as showing they had the clout to make Wolfgang Schäuble, the German finance minister, make bigger concessions to them than his fellow finance ministers.

Referring to calls between finance ministers in the early hours, Sven Giegold, a Green MEP in the negotiating team, said: “The European parliament is powerful. We can wake up Wolfgang Schäuble at 5.30am and he actually made concessions.”

Although the compromise largely bends to Germany’s vision for the system, some diplomats fear there is a small chance that the tentative deal could unravel, specifically over Berlin’s discontent at being required to mutualise the fund more rapidly than it said was acceptable.

The reform is the final leg of an ambitious project launched almost two years ago to fuse financial oversight in the eurozone and improve the resilience of the currency bloc against the ravages of its debt crisis.

Highlights of banking deal

The fund
● €55bn pot is built up over 8 years, not 10
● Fund is 40% shared in year one, 60% year two
● Finance ministers set bank levy to build fund
Decision making
● European Commission approves resolution decisions and suggests revisions
● Finance ministers have power to reject a resolution decision in certain cases
● Fewer checks on independent resolution board’s executive formation
● ECB has primary responsibility for declaring a bank likely to fail

However, the resolution system has faced criticism, including from the European Central Bank, for being too complex and inadequately funded.

The final terms make hard-fought changes to the negotiating position of EU states, which was heavily influenced by Berlin resistance to German taxpayers being exposed to any bank bailout.

Michel Barnier, the EU commissioner responsible for the reforms, said the deal had been won through the “spirit of compromise”.

“The Single Resolution Mechanism might not be a perfect construction but it will allow for the timely and effective resolution of a cross-border bank in the eurozone thus meeting its principal objective,” he said.

The main concessions made to the parliament is accelerating the build-up of a common bank-paid fund from 10 to eight years and front-loading its mutualisation, so that a bigger proportion of the fund is shared at an earlier stage. Under the provisional deal, 40 per cent of contributions are mutualised from the first year and 60 per cent from the second.

This is the one area that significantly tests the position of Mr Schäuble who said mutualisation should not be faster than the pace at which the fund is built up.

Some tweaks were also made to the decision-making structure. The Commission is given a formal role to approve resolution decisions recommended by an independent board. Finance ministers would be able to overturn the finding in limited cases.

The European Parliament and European Commission had pushed for a fully mutualised fund, with a strong external credit line, working under a system where Brussels rather than member states would have the final say on decisions.

Elisa Ferreira, the Portuguese MEP who led the parliament negotiating team, said the overall package “guarantees that we have a single resolution mechanism, financed by the banks . . .[with] no political interference”.

“We are convinced that we got an adequate agreement,” she added.

Even the modest changes finally made were fiercely resisted by Germany. Jeroen Dijsselbloem, the Dutch finance minister and eurogroup chair who spearheaded the final stages of talks, was in contact with Berlin as late as 6am to clear positions. After the call Mr Dijsselbloem re-entered the talks smiling and waving a piece of paper.

Other revisions include giving the ECB, as top supervisor, the primary responsibility for triggering a resolution process when a bank is identified as facing difficulties. However, as demanded by member states, the resolution board would be able to push for the closure of a bank against the judgment of Frankfurt.

Sharon Bowles, the chair of the parliament committee negotiating the text, said the extended talks set a record for financial services legislation. Asked for a comment on the deal as he left the talks, Mr Dijsselbloem said: “Goodbye.”

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