Accord on banking union faces stiff headwinds

Fresh from Thursday's eurogroup meeting at which finance ministers of the 17 euro zone countries agreed to consider retroactive ESM direct recapitalisation, Minister for Finance Michael Noonan chaired his final Ecofin meeting of the Irish presidency yesterday.

It was arguably one of the toughest of the six-month tenure, with the presidency hoping to get agreement on the contentious issue of bank resolution and recovery.

Banking union has emerged as the European Union's central economic policy response to the financial crisis, ever since leaders' commitment to break the link between sovereign and bank debt last June. But, having secured agreement for the single supervisory mechanism, the next two stages in the sequence – bank resolution and deposit insurance – have proved more controversial.

Common rules
The notion of having a set of common rules to govern the winding-down of banks, and in the process shift the burden of a wind-down away from taxpayers and onto the shoulders of the bank's creditors, has run into resistance from some member states, which are demanding a degree of flexibility in implementing the rules.

The UK, for example, has questioned the wisdom of having the same set of rules for very different kinds of financial institutions, and is against the establishment of a single resolution fund.

But while finance ministers were getting stuck into the fine print of banking resolution last night, the main challenges remain for the broader banking union framework itself.

The publication of a joint Franco-German document three weeks ago suggested a scaling back of proposals. Its plans on banking union were at odds with many of Brussels’ main principles.

That proposal favours a greater role for national resolution authority, favouring co-operation through a board of country representatives, in contrast to the European Commission and ECB's preference for a single centralised body, although division remains about who will actually assume this role.

Single authority
The ECB believes that a decision on when and how to wind up a bank should be made by a single resolution authority backed by a single resolution fund. The European Commission believes it should take charge of winding down banks, arguing that it is the only institution legally permitted to do so.

Whatever about divisions between Berlin and the EU institutions on who should decide on the winding-down of banks, agreement on the notion of a common deposit insurance system seem even more remote, with Germany distinctly cool on the idea of insuring bank deposits in other countries.

As it is Europe’s main policy response to the financial crisis, analysts and investors will be keen to see that the ambitious plan for a banking union is not blown off course.