Glacial progress on bank restructuring body through late-night wrangling

As the euro zone crisis has settled into a less-acute phase in recent months, the days of late-night meetings in Brussels appeared to be over.

Not so on Tuesday night: 28 finance ministers from across the European Union, including Irish Minister for Finance Michael Noonan, were locked in 15 hours of discussions in an attempt to hammer out agreement on a Single Resolution Mechanism, the EU's plan for a centralised body to shut down and restructure problem banks. While agreement was reached in principle on key elements, a final decision was postponed until next week, with ministers meeting in Brussels on Wednesday before a two-day EU leader summit

The SRM, as it is called, is a central plank of the EU’s response to the financial crisis as it attempts to prevent the kind of systemic problems that brought countries to the brink of bankruptcy.

If the basic tenet of the principle is simple – the European financial system, particularly within the single currency area, needs to be more integrated to function properly – the politics are not.

Banking union captures the conundrum at the heart of the EU project – while further integration is logical, indeed necessary, for successful functioning, countries are reluctant to cede more power to Brussels.

Germany, traditionally one of the most federalist of European states, has been leading the charge against the European Commission's proposal that it should be empowered to run the resolution authority.

According to the draft proposal on the SRM circulated to ministers and seen by The Irish Times, it has succeeded. The new proposal gives the European Commission only "observer" status on the resolution board staffed by representatives from member states. If the commission disagrees with a board decision, it will refer the matter to member states through the ecofin formation of finance ministers, while a sign-off on significant recapitalisations will be subject to a voting ratio based on European Central Bank key capital – a permutation which appears to give Germany an effective veto along with a small number of member states.

More significant is the proposal’s suggested resolution fund. A single, EU-wide fund that would pay for banking bailouts, thus avoiding taxpayers footing the bill, is the cornerstone. Under the draft proposal, the “single” fund will be divided into “national compartments” which will be responsible for funding bank bailouts in their respective countries. While this arrangement will be in place for the first 10 years as the fund builds up its resources, with funds gradually merging into a single fund over the 10-year period, the reluctance to pool national resources into one European-wide fund to tackle bank problems in the bloc is a significant capitulation to Germany. The proposal contains no mention of the euro zone’s only common rescue fund, the ESM, but this may be in the final agreement.

The financial intricacies and detail that have delayed the implementation of banking union threatens to cloud the project. Banking union represents one of the most significant transfers of sovereignty, at least in terms of financial matters, to Brussels in years.

Already the ECB is preparing to assume supervisory control for some 6,000 euro zone banks, 130 of which will be supervised directly by Frankfurt, including AIB, Bank of Ireland and Permanent TSB. The commission began to survey budgets of member states this year.

The resolution authority proposal, at least in its original form, envisages a more centralised approach to dealing with problem banks, effectively wresting decision-making away from national states and to Brussels.

Defenders of the proposals point out one of the aims of the new EU-wide legislation is to move the cost of bank bailouts away from the sovereign and on to the private sector. The new resolution rules being discussed with the European Parliament, and which will be implemented by the SRM, envisage a hierarchy of creditors that would be "bailed in" in the event of a bank collapse, including senior and junior bondholders, shareholders and large unsecured depositors – options not available to Ireland during its bailout.

Germany’s reluctance to cede further power to Brussels may risk watering down the proposals for a fully integrated banking union that analysts say is vital for the European economy. But Germany might have done a favour for those who worry Brussels wields too much power.