A misunderstanding of the banking union initiative

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From Mr Jonathan Faull.

Sir, Hans-Werner Sinn and Harald Hau (“The eurozone’s banking union is deeply flawed”, January 29) are confusing two separate legislative initiatives on bank resolution from the European Commission. The first one, which is for all 27 member states, concerns national resolution systems. It is currently going through the EU legislative procedure and has not yet been adopted. The second proposal is still in the design phase and has not yet been tabled by the commission. Profs Sinn and Hau, by definition, cannot have seen it. This forthcoming initiative will, it is expected, propose the establishment of a more integrated resolution system for the eurozone countries and other EU states wishing to join them. It will be the second part of the “banking union” initiative for the eurozone, following the single bank supervisory mechanism agreed unanimously by ministers in December and now being discussed with the European parliament with a view to rapid adoption.

Besides this basic misunderstanding, the professors’ article and its striking headline are both deeply flawed, for a number of reasons. The existing proposal on bank resolution does not prevent member states from introducing bail-in before 2018; 2018 is simply the very latest date by which they must do so. Even without bail-in in place, the current proposal would create other resolution tools such as a bridge institution, sale of business and asset separation which, if applied by a resolution authority, would leave senior creditors in a failed bank with losses largely equivalent to a bail-in. These tools, which are fully in line with the Financial Stability Board’s key attributes of effective resolution regimes, endorsed by the G20, will be in place from the beginning of 2015, once the proposal has been adopted. Furthermore, the figures mentioned seem to imply that, when in distress, banks would lose all their assets. This does not reflect the reality of bank distress. Even during the current financial crisis, state aid granted to banks corresponded in most cases to 10 per cent or less of their assets. In other words, their losses were 10 times lower than the “total wipeout” of assets claimed in the article.

Jonathan Faull, Director-General for Internal Market and Services, European Commission

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