European Banking union: what does it mean?
Q: Are we still talking about banking union?
A: Yes, I'm afraid so. The bureaucratic workings at European level are extremely slow and of the three pillars of a pan European banking union - a single body to supervise European banks, a common scheme to deal with failing banks, and a common deposit guarantee scheme, we've only managed to get agreement on the first - the so-called Single Supervisory Mechanism- which entrusts the European Central Bank (ECB) with being the watchdog for European banks.
Q: Why is it taking so long and proving to be so difficult? I thought European leaders were committed to the idea that financial and banking governance in Europe had to be strengthened in the wake of the crisis?
A: They did, but remember you're dealing with 28 different countries, each with governments who have voters to answer to. Trying to get agreement with that many personalities around the table can be tough. Added to that, what is being proposed is a fundamental shift towards a more centralised form of financial governance in Europe. While all agree on the need for banking union to fend off any future crises, some countries are at odds on the extent to which power should be centralised, with even the two Eurozone giants, Germany and France, differing. The whole proposal entails a deepening of integration and raises questions about the sovereignty of states. It's a complicated process, both politically and diplomatically.
Q: Oh good, we could be doing with more complexity at the European level. So where are we currently at?
A: European finance ministers are trying to nail down agreement on the second pillar of a banking union, the Single Resolution Mechanism (SRM), or common rules on how to deal with failing banks. But there are two main issues at play - who will decide when a bank should be shut down or saved, and who will have to cough up the money to pay for it?
Q: Don't keep me in suspense, what are the answers?
A: In July, the European Commission proposed a Single Resolution Mechanism, including a single resolution board and a single resolution fund. It would potentially mean the Brussels-based body would take on the tricky role of closing failed banks. But this has faced opposition from Germany, which questioned the legality of it. There are reports that there may now be a compromise proposal on the table.
In addition, the single resolution fund has proved to be divisive.
Q: The proposal is that the €55bn pot would be funded from levies on the banks, but that's years away from being realistic. The question is where will the cash come from in the meantime?
A: Germany does not want a single 'backstop' fund, such as the European Stability Mechanism (ESM), to pay for the clean up if a struggling bank in one member state has to be shut down, preferring a network of national funds.
France, however, backed by Italy and Spain, want a more unified European response.
To minimise any costs to taxpayers, the ministers have already agreed that bank shareholders, bond holders and potentially even depositors with more than €100,000 euro will be the first to lose money in the case that a bank is wound down. But it's still not been pinned down as to when those rules will be in place.
Q: So we're going no where fast then?
A: That's one way of putting it. And to add to the pressure, ministers face a year-end deadline to reach agreement, and ahead of a Summit of European leaders scheduled for just days before Christmas. Some hope emerged on the eve of yesterday's meeting of European finance ministers in Brussels that there may be a breakthrough, and further signs emerged early this morning.
In search of a compromise, ministers from the biggest euro zone economies - Germany, France, Italy and Spain along with Eurogroup chair and Dutch Finance Minister Jeroen Dijsselbloem - met with senior officials in Berlin on Friday. Mr Dijssebloem was said to have tabled a compromise proposal, and according to reports, the differences between Germany and France had narrowed by Monday night. There may also be some compromise proposal on the table on having the Commission take a leading role in bank wind downs following yesterday’s meeting.
Q: Where to now?
A: The Finance ministers may have done the ground work, but it may fall to Europe's political leaders, including Chancellor Angela Merkel and France's Francois Hollande, to move the process further forward when they meet for their two-day Summit on December 19. The Ministers, however, will return next week ahead of the Summit in the hope of thrashing out agreement before the Summit.