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EU Banking Reform: unity is strength?

At its last plenary session before electoral recess, the European Parliament has passed three laws cementing the foundations of an EU-wide banking union. The Single Resolution Mechanism, passed by 770 to 88 with 13 abstentions, limits the contentious role of national governments, resolutions will be triggered by an ECB-led decision, effective as of 1st January 2015.  The Single Resolution Fund will be EUR55bn., paid for by bank levies over eight years, the fund is to be 70% mutualised within three years, effective as of 1st January 2016. The SRM and SRF will initially only apply to euro area banks. The Bank Recovery and Resolution Directive, approved by 584 votes to 80, with 10 abstentions, stipulates that a total of 8% of a failing bank’s liabilities must be subject to bail-in before recourse to the SRF and will apply to all 28 member states.

“In most cases this would see shareholders and many bondholders wiped out. After this threshold, the resolution authority might grant the bank use of the resolution fund, accessing funds up to a maximum of 5% of that bank’s assets,” the European Commission said in a memo last month.

The Parliament also approved an update to the deposit guarantee directive, insuring bank deposits up to EUR 100, 000. Payment times have been reduced from 20 to 7 days and the funding structure has been strengthened. The approval of the SRM and BRRD constitute the second pillar of banking union, complementing the Single Supervisory Mechanism which came into force in late 2013.

“The E.U. has lived up to its commitments,” Michel Barnier, the bloc’s commissioner for financial affairs, said in a statement. “Not only does the banking union help to restore confidence in the banking sector, but it also ensures a truly European system of supervision and resolution of banks when they fail.”

It does- if “truly European” implies deeply flawed and compromised. The common resolution fund is miniscule and will take up to eight years to be fully in place. Bondholders will bear the initial bail-in cost of a failed bank, but the final, and likely to be much larger, bail-out costs will still rest with national governments. This arrangement places an onerous burden on the Single Supervisory Mechanism to obviate the need for the unsatisfactory resolution mechanism to be triggered and does nothing to sever the unwholesomely umbilical ties between TBTF banks and their sovereigns. Given that member states will retain a veto over any subsequent adjustments to the various mechanisms, future change will be difficult at best; the shape of EU Banking Union is now largely set in stone, cracks and all.

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