EU leaders reach deal to complete banking union

The European Union’s plan for an integrated banking union passed a decisive milestone today after member states and the European Parliament reached agreement on the Single Resolution Mechanism, a centralised resolution body and accompanying €55 billion fund that will be responsible for winding-up troubled banks.

While agreement on the complex piece of financial legislation was reached between member states in December after months of talks, the Greek presidency of the council had been tasked with reaching agreement between member states and the European Parliament under the EU’s co-decision system.

Following months of talks, the Parliament finally signed off on the deal this morning following 16 hours of talks in Brussels.

The negotiations began at 3 pm yesterday afternoon, with bleary-eyed negotiators, including euro group president Jeroen Dijsselbloem emerging with a deal at 7am. At least one phone call was made to German finance minister Wolfgang Sch äuble at 5.30am on the deal which is largely seen as favouring smaller countries such as Ireland, by accelerating the pace at which the €55 billion fund will be fully mutualised.

The European Parliament secured a number of changes from the original position agreed by member states, which itself had conceded to a number of German demands in the early set of discussions regarding mutualisation.

Under the package agreed, the period during which the €55 billion fund will move from being a pool of different national funds towards a fully shared fund has been reduced from 10 years to eight. The new proposal also sets out a quicker pace of mutualisation, with 70 per cent of the fund fully pooled within the first three years, compared to 30 per cent in the first draft, which had conceived of a gradual mutualisation of 10 per cent per year over a decade. Under the revised package 40 per cent of the fund will be mutualised in the first year, 20 per cent in the second year, and the rest equally over a further six years.

According to Dutch MEP Corienn Wortmann-Kool this will create a resolution process that would treat banks equally regardless of country they were based in. “We want bail-in of creditors and investors to be applied in the same way to all banks irrespective of the member states these banks are located in,” she said using the example of Ireland as compared to larger states such as Germany and France.

While the plan agreed in December would have meant that a French or German bank, for example, with a large fund behind them would have been able to implement a moderate bail-in, an Irish bank with a smaller national fund would be forced into a deeper bail-in, leading to higher funding costs, she said.

“This would definitely not be what we want to achieve in terms of breaking the link between sovereign and banking debt,” Ms Wortmann-Kool said in a press conference in Brussels this morning.

The agreement also envisages that the European commission will approve decisions made by the SRM’s board on resolving banks, rather than member states, though finance ministers will still have the right to intervene in certain cases. MEP’s had been trying to limit the power of member states to interfere in the decision-making process, amid fears of political interference.

The fund will also have a borrowing capacity, which will go some way to assuaging some concerns about the firepower of the €55 billion fund.

Asked if the imminent European elections had contributed to the outcome of today’s agreement, Ms Wortmann-Kool denied that there had been any political grand-standing at play, or that MEP’s had been under time pressure to reach agreement too early.

“During the process we got a lot of support from the ECB, from the European Commission from experts [...]actually we haven’t met any expert who could explain to us that Council’s position in December could really work, effectively, therefore for us it was extremely important to achieve a credible system.”

The changes achieved by the European Parliament showed democracy at work, she added.

The European Parliament will now have to vote on the proposal at their plenary session in Strasbourg in made-April, the last session before the European elections in May.

EU Internal Markets commissioner Michel Barnier said the agreement allows the completion of the “architecture of the banking union for the euro zone.”

“Backed by an appropriate resolution funding arrangement, and an acceptable decision-making process, this second pillar of the banking union will allow bank crises to be managed more effectively, “ he said.