EU finance ministers agree to new bank supervision

EU finance ministers took a key step Tuesday toward a ‘Banking Union,’ the new regulatory framework meant to prevent any repeat of the financial meltdown which plunged Europe into crisis.

“Done! Single supervision mechanism for EU Banking Union approved unanimously,” Jonathan Faull, the top civil servant for EU Financial Markets Commissioner Michel Barnier said in a tweeted message.

The Lithuanian chair of the finance ministers meeting also confirmed approval.

The decision will “set up one of (the) banking union pillars, add to credibility of Europe financial system,” Finance Minister Rimantas Sadzius said in a tweet.

With this final approval by all 28 EU finance ministers, the SSM should now come into force in one year’s time, in accordance with EU practice.

The SSM was originally supposed to start early next year but the timetable slipped amid sharp differences over its precise role and especially over how it would relate to non-euro countries.

Non-euro Britain is home to the European Banking Authority, which is supposed to draft the rules for all banks in the EU, while the SSM is to be run by the Frankfurt-based European Central Bank.

To ensure that the 17 eurozone members did not out-vote the 11 non-euro members also grouped in the EBA, London got agreement in December that there would have to be a «double majority» in both camps for any action.

This understanding was confirmed again in talks this week, clearing the way for the SSM and ultimately the Banking Union structure overall.

The SSM agreed Tuesday is to be complemented by a Single Resolution Mechanism to close failing banks and a deposit guarantee regime to protect savers.

Combined, this will provide the comprehensive, single regulatory framework intended to avoid any need for taxpayers to have to fund the disastrously expensive bank bailouts which led to years of austerity and recession in the eurozone.

The resolution mechanism however is proving even more controversial than the SSM, with many member states including powerhouse Germany reluctant to cede too much control of their banks and concerned about how it should be financed.

German Finance Minister Wolfgang Schaeuble was notably restrained before Faull’s announcement.

“We have made a step forward by deciding – probably – the legal basis for the SSM,” Schaeuble said.

“Now we have to make sure to decide on the other legal issues as soon as possible,” he said.

Jeroen Dijsselbloem, Dutch finance minister and head of the group of 17 eurozone finance ministers, said “some countries are still debating about the legal base so I have to convince them or find another solution.”

As the debate twists and turns, an immediate practical issue concerns “backstop arrangements” to pay for potential bank closures until the SRM begins its work, most likely in several years.

One option being discussed is to tap the European Stability Mechanism, the 500-billion-euro eurozone bailout fund which has been used to help Spanish banks.

However, it is unclear how this would work in practice and especially if a member state seeking such ESM help would also have to accept tough economic policy conditions as in the full bailouts accorded Greece, Cyprus, Ireland and Portugal.

Sweden’s Anders Borg said ministers “first and foremost must clarify backstops” before the ECB completes tough asset tests on the banks next year to pave the way for the supervisory mechanism to begin its work.

The stress tests, which are supposed to be much tougher than previous reviews, should give a clear indication of whether European lenders need fresh capital.

If they do, new rules require governments to progressively ‘bail-in’ private creditors and uninsured larger depositors.

If that is not enough, then state aid is the next option while the EMS is also another possibility.

EU Economic Affairs Commissioner Olli Rehn said last week state aid would be acceptable and would not count against deficit and debt targets, an important concession. [AFP]