Daniel Ritort

EU leaders approve euro zone banking reform

Euro coins and notes

Euro coins and notes

European Union leaders are meeting in Brussels to approve a common set of rules for managing the closure of failing euro zone banks in an orderly way.

Under a plan agreed by finance ministers a 55bn-euro fund will be set up, financed by the banking industry, over 10 years.

The deal is aimed at building a European Union banking union that should minimize the need for taxpayer-funded bailouts. It could be the biggest centralization of European Union power since the euro’s launch.

Today the leaders agreed on steps to improve defense co-operation, including the European Union rapid response capabilities and more flexible and deployable European Union battle groups. The European Commission has highlighted that there is too much duplication in Europe’s armed forces.

Under the banking union plan, a new European resolution authority will be created, to decide when and how insolvent banks are to be closed.

Analysts said this is a very complex compromise, some say too complex to ever work effectively.

They argued that still the fact that anything has been agreed is significant. Bank resolution has always been a very sovereign issue, dealt with by individual countries. That’s why this can be seen as the biggest centralization of power in the European Union since the creation of the euro.

Some euro zone member states want to go much further and still believe they can. But some countries that are skeptical about pooling financial risk like Germany remain hesitant at best. The bottom line is that the search for a real pan-euro zone financial backstop goes on, and without one there will plenty of people arguing that this is not a proper banking union.

A resolution fund paid for by the banks themselves would gradually merge national pots into a common European fund.

The idea is to minimize the collateral damage from bank failures. But analysts said the fact that euro zone finance ministers have retained the powers to decide the fate of failing banks does not augur well for speedy action.

And the 10-year lead time will not reassure the creditors of Spain and Italy, for example, that they will not end up liable. Moreover 55bn euros is tiny compared with the balance sheets of euro zone banks.

European Union leaders are keen to finalize a deal before new bank stress tests begin next year. The stress tests are expected to reveal that some banks are overexposed, and will require new injections of capital.

The European Central Bank (ECB) has been put in charge of euro zone bank supervision.

The first pillar of banking union will be the ECB’s new supervisory body to monitor all 6,000 banks in the euro zone. Germany and some other countries want to retain their own high degree of supervision over smaller banks, which are reckoned to pose less systemic risk

The second part is the Single Resolution Mechanism, to bail out or shut down problem banks in the euro zone

The final pillar is a common deposit guarantee, setting an European Union-wide deposit guarantee of 100,000 euros maximum per saver. There will be a common rulebook covering bank accounts across the European Union.

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