Opinion
Europe’s ungainly banking revolution
Publish Date: Feb 11, 2014
newvision
  • mail
  • img

By Daniel Gros

LATE last year, eurozone finance ministers reached a compromise on the basic elements of the Single Resolution Mechanism (SRM) – that is, how to deal with banks in difficulty. It looks ugly, but it also appears likely to work.

The main ingredient of the compromise is to use, at least initially, separate national funds in case a bank needs to be saved, while also creating a common Single Resolution Fund (SRF) of up to €55 billion ($75 billion) over the next ten years, which is to be financed by contributions from the banks themselves.

The entire SRM would be run by a collection of national supervisors and representatives from the European Central Bank and the European Commission.

The defects of this compromise are apparent. For starters, the SRM will not, at least at the beginning, be a “single” mechanism at all. National funds – and thus national authorities – will continue to be responsible for “their” banks’ problems, with the SRF’s contribution to any rescue operation rising only gradually.

It will be at least a decade from now – roughly the year 2025 – before the SRM is really “single,” with the use of separate national funds ending.

That is, of course, a long transition period. But, because the ECB is in the process of conducting an asset-quality review of bank balance sheets, there is little danger that too many skeletons will remain in banks’ closets.

Moreover, after five years (by 2020), the SRF could already have close to €30 billion ($40 billion) available, more than most national funds, thus providing an important backstop should any national fund be insufficient.

To be sure, it is not ideal that the SRM will cover only those banks – around 120 in total – that will come under the ECB’s direct supervision at the end of this year. But this makes sense at the beginning, when the ECB will have its hands full getting a grip on the banks under its direct control (which, in any case, constitute about four-fifths of the eurozone’s banking system).

Theoretically, the ECB is also the indirect supervisor of all of the thousand or so smaller banks in the eurozone, but it will take some time before this becomes effective.

Another inelegant part of the proposed arrangement is that the SRF will not be part of the EU machinery; instead, it will be established by an intergovernmental treaty (now being rapidly negotiated among eurozone member countries). But this intergovernmental agreement is likely to be only a transitory solution.

There have been other cases of major initiatives that started outside the legal framework set by the EU treaties, but that were later incorporated into the acquis communautaire (the body of EU law), thus bringing them under the control of the Commission and the Parliament. This is what happened to the Schengen free-travel area, for example. The same is likely to happen with the SRF.

The incredibly complicated decision-making process that has been proposed for the SRM, which, on paper at least, would involve more than 100 individual officials and many committees, is also unlikely to represent a real obstacle, as bank restructuring usually has to happen in a matter of days, typically over a weekend.

The few who know the details of a particular case will make the key decisions, while the rest, with little knowledge of (or stake in) the matter, will be politely asked to go along. When the SRM and the SRF are brought back into the EU system, the decision-making mechanism will need to be revisited.

The size of the SRF has often been criticized as being insufficient. But this is wrong: €55 billion would be enough to deal with all but the very largest banks in Europe. It would also be sufficient to deal with a systemic crisis in small to medium-size countries like Ireland or Portugal. Even Spain needed “only” €60 billion from the European Stability Mechanism at the peak of its crisis.

In any event, a restructuring fund can be only a first-aid kit to deal with an isolated accident (or two). Systemic crises always require a fiscal backstop. On this account, the SRM proposal is also incomplete.

But at least the eurozone now has a permanent mechanism to support governments facing difficulties. While there is no explicit agreement, there can be little doubt that if a major crisis threatens to overwhelm the SRF, the funds needed to save the eurozone’s banking system from collapse will be found, because all of the member states participating in the SRM will have an incentive to back up their common investment.

The plan for the gradual constitution of a common resolution fund constitutes an awkward step in the right direction. It leaves as many problems unresolved as it addresses. But the end result is likely to be quite strong, because it establishes a key innovation: a common fund that effectively mutualizes much of the risk resulting from bank failures.

Writer is the Director of the Center for European Policy Studies

The statements, comments, or opinions expressed through the use of New Vision Online are those of their respective authors, who are solely responsible for them, and do not necessarily represent the views held by the staff and management of New Vision Online.

New Vision Online reserves the right to moderate, publish or delete a post without warning or consultation with the author.Find out why we moderate comments. For any questions please contact digital@newvision.co.ug

  • mail
  • img
blog comments powered by Disqus
Also In This Section
Poverty and greed: the major culprits of environmental degradation
Our standards of living are based on inexpensive energy in the form of electricity and gasoline powering automobiles that are the major contributors to environmental problems in the world today, but let us not forget that earlier in history; automobiles were actually heralded for solving a distinct...
Climate change: The Impossible deal
For “shall”, substitute “may”. For example, change “countries signing this climate change treaty SHALL state how much they are going to cut their greenhouse emissions” to “countries signing this climate change treaty MAY state how much they are going to cut their emissions if they feel like it, but...
Who really cares about the Ugandan girl?
The UCE and UACE 2014 public examinations are now done with and the other classes are at home for Term Three holidays. The students from the secondary schools especially have flooded our localities. Most conspicuous of them will be the girls; but who cares?...
A delegate conference is not a pilgrimage
At the last NRM delegate’s conference held at Namboole, the National Executive tabled a motion regarding the period at which the holding of a delegate’s conference should be....
Corruption: they that are not corrupt can hurl the stones
So the 2014 Corruption Perceptions Index ranks Uganda 142nd out of 175 countries, according to Transparency International. Based on expert opinion, Transparency International says our level of public sector dishonesty is 26 out of 100. Denmark is the most transparent with a score of 92/100 while So...
The evil of deforestation
Africa is facing very many problems but few have been solved. One of the major ones is environmental degradation through deforestation. Deforestation is having a big impact on the environment....
Do you agree with the ban on the export of maids?
Yes
No
Can't Say
follow us
subscribe to our news letter