EU finance ministers tackle Banking Union differences

EU finance ministers will try again this week to resolve deep differences over how to supervise, and, if necessary, close, failing banks before they can plunge the economy into crisis. Ireland was among the worst affected by the collapse of its banks but over the weekend announced it would exit its 3-year, 85-billion-euro bailout programme on schedule in December. The Irish news, plus the fact that further aid for twice-bailed out Greece is not pressing, highlights how far the 17-nation eurozone has come since the dark days of 2009-10. Now the spotlight and the controversy is on what comes next. At the height of the global financial meltdown, ambitious plans to ensure that the taxpayer would no longer have to foot the bill for bailing out overextended banks made sense, along with much tighter economic policy coordination adopted by EU governments. But as the pressure has eased and the European economy stabilised, national concerns have resurfaced, making implementation of the mooted "Banking Union" ever more difficult. The 17-eurozone ministers meet Monday in Luxembourg, followed by talks Tuesday with their 11 non-euro colleagues hoping for progress on a hugely complex issue surrounded by political sensitivities. In a research note entitled, "EU Banking Union: Right idea, poor execution," Deutsche Bank said the plan "has a sound economic rationale and would, if it were implemented in a consistent fashion, substantially strengthen financial stability in Europe and in the euro area in particular." The problem, however, is that it suffers "from two very fundamental contradictions." On the one hand, there is a schizophrenic attitude of member states with regard to the necessary degree of supra-nationality to preserve a financially stable internal market for financial services. "On the other, there are the contrasting expectations and motives of member states with regard to Banking Union," it said. Driven by the debt crisis, the eurozone has already agreed a Single Supervisory Mechanism, due to be operational late next year, to regulate the sector under the European Central Bank. The next step is a Single Resolution Mechanism, open also to non-euro members who want to take part, to close banks that cannot be rescued. Top EU and ECB officials say the SRM is essential to complement the SSM. But many member states, including EU powerhouse Germany, are reticent, especially over how to fund the SRM's role which Berlin feels requires changes to the bloc's core treaties -- a fraught prospect. A stop-gap solution might be to tap the European Stability Mechanism, the eurozone's bailout fund, which has already helped Spanish banks. One EU official, conceding that the SRM "is still quite some way away" from agreement, said "the assumption is that the ESM could play a role" and then be repaid by an industry levy. There is an immediate problem too. The ECB is supposed to carry out tough tests next year to see if the banks are strong enough to survive another crisis or need more capital. Under new rules, a bank found to be short of capital must first seek fresh funds on the markets, then progressively "bail-in" creditors and potentially larger uninsured depositors. If all that fails, governments may have to make up the shortfall in the interim. Significantly, EU Economic Affairs Commissioner Olli Rehn said last week that such government aid would not be counted against member staes as they try to meet EU deficit and debt limits. Another concern is that the ECB could face a conflict of interest if it were to house the SRM and so the new body is destined at least initially to come under the European Commission, the EU's executive arm. That option, however, stokes many of the the reservations noted by Deutsche Bank. A Deposit Guarantee System to assure depositors their money is safe, even at times of stress, would complete the 'Banking Union,' so ensuring a comprehensive, single regulatory framework run from the centre to bolster the single currency area. With so many outstanding issues to be resolve, the outlook for that overall solution is not good. The reaction to the SRM "reveals fundamental opposition rather than mere technical concerns ... member states are unwilling to face up to the logical consequences ... for national sovereignty," Deutsche Bank said. "Unless this changes, Banking Union will fail."