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Thursday, 19 December 2013

New banking union design seems “the worst of all worlds”, as it tries to run with the hare and hunt with the hound (called Germany).

This morning, a proud chairman of the Euro-group and Dutch finance minister, Jeroen Dijsselbloem, presented ‘his’ agreement upon the European Banking Union to the world.

Initially I thought: “Well, that is a nice step forward on the long and winding road to risk mitigation in the European financial industry”. That was, until I learned the details of this banking union agreement and saw that these details had the letters “G.E.R.M.A.N.Y.” written all over them. In fact, the agreement turned out to be “the worst of all worlds”, as it tries to run with the hare and hunt with the hound.

The Financial Times had a large article upon this agreement, of which I write the pertinent snips:

Europe took a big step towards completing its banking union on Wednesday, in spite of warnings that the planned system for handling bank failures was inadequately funded and unwieldy.

After a fortnight of fraught negotiations involving six separate meetings of finance ministers, EU countries backed a deal to create a common bank resolution regime and fund, with a design heavily influenced by German efforts to keep its taxpayers off the hook.

Germany’s strong legal objections and concerns framed the talks. Its main concession was to establish a resolution fund paid for by the banks. The fund will gradually merge its national parts into a common European whole over a decade, until it hits its €55bn target funding level by 2026.

On other fronts, the views of Wolfgang Schäuble, the German finance minister, largely prevailed over the European Commission, Italy and France. Most significantly he succeeded in rebuffing demands for a public backstop to the resolution fund while it is at less than full strength. It means there will be no additional taxpayer-funded eurozone safety net for the next decade, leaving any bank’s home state largely to foot the bill if its collapse overwhelms the embryonic resources of the banking union system.

The limited cost-sharing, especially during the system’s early years, calls into question one of the primary goals of the banking union project: to end the so-called “doom loop” between weak banks and their weak sovereigns.

Mr Schäuble agreed to establish a backstop for the system by at least 2026 but left the details of how it would operate to later negotiations.

Legal constraints and demands for national safeguards have led to a complex decision-making process. Under the final compromise, finance ministers agreed to grant themselves – as the EU Council – the ultimate authority on whether a bank is closed.

This meets Berlin’s longstanding demand to cut out the European Commission, which had initially proposed itself as the approving authority. The ministers vote through a weighted majority.

The rest of this must-read article is a ‘nightmare’, with respect to:
  • The necessary arrangements for cash-strapped banks-in-need, which have to be approved by too many national and EU officials and leave too much room for arguments and ‘fun and games’ by national governments;
  • The question, at what moment the ‘national compartments’ of the banking union will be supported by the supranational funds from all EU countries combined. For this decision, an additional government treaty, was necessary to lure Berlin;
  • The rescue procedures, which might take weeks to deploy, while a cash-strapped bank has only days or even hours left for survival, due to the ubiquitous possibilities for an online bank-run. 

And then we hope that the financial markets will put their confidence in this seemingly ‘dead on arrival ‘ European banking union scheme. 

Yes, we do…!

As a life-long European and interested EU-watcher, I know that in Europe the intentions to a plan are often more important than the plan itself. Most European plans are undoubtedly a bureaucratic drama, but the fact that they are there, gives some kind of confidence to the stakeholders. For this reason, I have to cut Jeroen Dijsselbloem some slack.

It is nothing less than an Olympic achievement to get the 27 frogs in a wheelbarrow – aka the EU – in one line, as the national interests are seldomly aligned. To that respect, Jeroen Dijsselbloem did a helluva job, which will gain him much authority, after his shaky start as chair of the Euro-group at the beginning of 2013.

But… and here start the many ‘but’s’ of this banking union scheme:
  • Why does it have to take no less than 13 years (!) – until 2026 – to build up a (bank-financed) resolution fund of only €55 bln?
    • Especially, as every high-ranked bank official knows that this amount is far from enough, when a bank of the size of Commerzbank, Barclays or BNP Paribas gets strapped for liquidity. Not even to mention, when more than one bank is under jeopardy of defaulting;
  • What will happen, when a really large bank defaults within – say – two years? 
    • Is every country on its own then?
    • Could this spark a new banking crisis within the Euro-zone?
  • Why does this fund have national compartments, that must be ‘used up’ first, before the supranational funds kick in eventually?
    • This bombshell will take away the confidence of the financial markets, that there is a rock-solid resolution fund: a fund that can take the panic out of the markets and the European citizens, before such a panic can even break out;
  • Why does it take so many approvals from the involved countries and officials to get the resolution in action?
  • Why do we get such a time-consuming procedure, when time is paramount in case of a bank, threatening to default?
  • Why do the host countries of a bank-under-jeopardy have the final saying in the immediate future of the bank, while this possibly opens the floodgates for arbitrariness, politically motivated nepotism and covert lobby practices by the bank in question?
  • Why don’t the members of the European Council trust the ECB or the European Commission to do a proper job, while rescuing a bank?
    • Is it because the European Commission are incapable people? Or the ECB officials are incapable people? 
    •  Or is it just that the members of the European Council don’t dare to ‘sell’ to their grassroots, that they lost a little sovereignty in exchange for much more financial security?!
On Twitter, the anti-European and anti-EU fear-mongerers in my country were warning us,’ that today The Netherlands as a sovereign state had seized to exist and that we would be governed by a faceless elite of Euro apparatchiks’.

At the same time, the chairman of the European parliament had some other – IMHO more realistic – objections. These were written down in an article by the Dutch daily newspaper NRC:

The system for the resolution of defaulting banks, on which the European finance ministers agreed yesterday, is unacceptable for the European Parliament. This was stated today by chairman of the EP, Martin Schulz, during the assembly of the European Council.

During the European Council, Schulz stated that the system to rescue or settle defaulted banks, had to be more simple and effective, than had been agreed upon by the European finance ministers.

The European Commission should be the “executive responsibles” for the ‘single resolution mechanism’ (SRM) and not the member-states themselves. Besides that, there ought not to be a separate treaty between the participating countries, necessary for arranging the payment conditions of the SRM.

On top of that, the EP thinks that during the initial phase, when the resolution fund is not properly funded yet, the SRM should be replenished with funds from the European Stability Mechanism. The finance ministers, however, agreed on using national funds in the start-up phase.

In this Wednesday’s treaty for the settlement of European banks, aka the ‘single resolution mechanism’ (SRM), it is agreed that the banking industry itself should initially pay for a defaulting bank. For this, a mutual resolution fund is established, in which the European banks should put money themselves. A bank in need could make usage of this fund. However, it will take to 2026, until this fund has reached its full amount. Until then, the dismantling of banks should partially take place using national funds.

I agree with everything that Martin Schulz said in the aforementioned article, including the usage of ESM funds during the start up phase of the European Banking Union.

This whole resolution fund should be a nuclear option: something of which you hope that you never have to use it, but which is there ‘just in case’. Instead, too much of this final version of the European Banking Union scheme seems just there to keep the German government officials out of the wind. 

By doing so, the whole fund is in fact undermined and perhaps even ‘dead on arrival’, due to being toothless and irrelevant, like a machine gun without bullets. 

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