Agreement works in theory but might be different in practice
AFTER endless meetings and late-night talks, European politicians hailed yesterday's provisional agreement on the final pillar of banking union as decisive – but it's not without its critics who claim the process is underfunded and complicated.
The ambitious plan was drawn up to ensure the impact of any future financial crisis would be minimised and wouldn't again fall on the shoulders of taxpayers.
With the European Central Bank becoming the single supervisor of eurozone banks in November – the first pillar of the so-called banking union – there needed to be a centralised authority designed to close down failing banks when needed.
That's where the Single Resolution Mechanism (SRM) comes in, and that in turn needs to be able to draw upon a pooled pot, the Single Resolution Fund (SRF).
Finance ministers and MEPs put forward their own proposals on how the SRM and SRF might work late last year, and both have been wrangling since to reach common ground.
Disagreements abounded about how quickly to build up the resolution fund and who specifically would have the role of deciding when a bank is failing. Germany, concerned about sharing the cost of foreign bank failures, had taken one of the toughest lines.
In the end, political expediency won out, and compromise was achieved including allowing for the fund to be built up over eight years, instead of the first mooted intention of doing it over a decade.
But some analysts have questioned the effectiveness of the agreement. For starters, the pooled fund, at €55bn, has been criticised for being too small.
But agreement has already been reached to ensure that when a bank gets into trouble, bondholders, shareholders and wealthy depositors would be hit first under new rules.
The fund will also be able to borrow, which could go some way to assuage fears that it may not be big enough. It will not, however, be backed up by Europe's bailout pot, the European Stability Mechanism.
Concerns aside, it's a significant step, in theory. How it works in practice remains to be seen.