After months of deliberation and some not-so-private sparring with Berlin, the European Commission has pretty much anointed who it wants to be the all-powerful bank bailout and clean-up authority for Europe’s banking union: the European Commission.
This (somewhat predictable) conclusion to its internal policymaking journey is outlined in a paper, seen by the Financial Times, which was distributed to commissioners ahead of their weekly college debate on Wednesday.
There is no sign of Brussels bowing to pressure from Berlin. At the heart of the Commission’s proposed system is a powerful central authority, which has access to a single bailout fund and the clout to shut down a bank even against the wishes of its home state’s government. Brussels wants it operating by 2015.
What about those German concerns that this would breach the EU treaties? Michel Barnier, the EU commissioner responsible for financial issues, concedes in the paper that “only an EU institution” has the legal authority to take important decisions with European effect. Given there is no legal basis to give the European Central Bank this role, the Commission concludes that the only option is to anoint itself as the top resolution authority.
This goes well beyond the network of resolution authorities — or “board” — that Berlin prefers until the treaties can be changed. The Commission blueprint would create a separate resolution body to prepare decisions for the Commission to take, which is steered by a powerful executive board, dominated by Commission and ECB appointees. Member states could appoint a “limited” number of board members:
In each specific case, an executive board would take all operative decisions regarding what resolution action to propose to the Commission for its adoption. It would also decide autonomously on less discretionary actions involving for instance information gathering from banks and on-site inspections. The executive board would include permanent members appointed by the Commission (as final decision-making authority) and the ECB (as bank supervisor), as well as a limited number of members appointed by directly affected Member States.
To spell it out: the Commission is empowered to independently decide when to close down a bank. It can pull the trigger even when the bank’s parent state thinks it is solvent or disagrees with the form of resolution. Indeed Brussels has the power to shut down the bank even when the ECB as bank supervisor has not said it is in trouble. The only concession to member states seems to be that national authorities would be responsible for discharging the resolution and allocating losses among creditors — but only under the “oversight” of the resolution body.
Alongside this legal authority, the resolution body needs access to money. Berlin thinks this should be provided through building up national funds and perhaps knitting them together over time. Barnier goes for a more ambitious option: a single fund for the banking union, built up through private sector contributions:
This would provide substantial synergies and enhance financial stability, compared to a mere network of national resolution funds, by pooling resources from and for all participating banks. Furthermore, this would prevent coordination problems arising in the deployment of national funds. Finally, it would be instrumental in breaking the link between sovereigns and banks. It is also the preference of the ECB, as it would strengthen the credibility of the whole mechanism.
Banks would contribute “according to their risk” and those countries with existing resolution funds would gradually transfer those to the single pot. Even so it would take time to build up a serious fund. The Commission’s thinks that if the pot proves too small in a crisis, extra money could be raised after the event. The fund could also be empowered to “borrow from the market or for third parties”. “The backstop and the guarantee of the fund would thus be the assets of the euro area banks,” it says.
One interesting omission in this section is any mention of the European Stability Mechanism, the eurozone’s €500bn permanent bailout fund. In their joint letter France’s François Hollande and Germany’s Angela Merkel agreed that the ESM should provide a credit line to the resolution fund. But before any loans are extended the ESM would need Bundestag approval, of course, which is perhaps why the Commission gives the resolution body a wider range of borrowing options.
The Commission blueprint, taken as a whole, far outstrips what Merkel and Hollande were able to agree in their letter. The Franco-German plan left a lot of blank spaces in key areas, not least in the exact balance of power between the centre and member states. The Commission’s response is to assume that silence meant centralisation. It’s vision much closer to the pure French (and ECB) view of resolution and pays little more than lip service to Berlin’s legal and political concerns.
There are details still to be settled and of course this is only a discussion paper to the college of EU commissioners — in theory there could be enough objections to overhaul the plan before it is published later this month. But that is unlikely. It looks like Brussels will set a high bar for the talks, which realistically need to be concluded between member states by December. Over to you Berlin.
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