European policymakers on Thursday (20 March) agreed to complete a banking union, creating an agency to shut failing eurozone banks. However, there will be no joint government back-up to help cover the costs of closures.
After 16 hours of non-stop talks, the European Parliament and eurozone countries have agreed on the new scheme, completing the second leg of banking union that is due to start this year when the European Central Bank (ECB) takes over as watchdog.
The banking union, and the clean-up of banks’ books that will accompany it, is intended to restore banks’ confidence in one another and boost lending across the currency bloc. This should help foster growth in the 18 economies that use the euro.
It is also supposed to break the vicious circle of indebted states and the banks that buy their debt.
The details of the compromise, which must still get approved by the European Parliament and EU finance ministers, are outlined in a draft agreement and were confirmed by participants in the talks.
Under the deal reached, a €55 billion fund made up by levies on banks will be built up over eight years, rather than 10 as originally envisaged. 40% of the fund will be shared among countries from the start, and 70% after 3 years.
It also envisages giving the ECB the primary role in triggering the closure of a bank, limiting the scope for country ministers to challenge such a move.
The fund however, will not be able to rely on the eurozone bailout fund to borrow extra money if it runs out of funds with critics saying this meant that the banking union will never live up to its name.
“The key to the banking union is an authority with financial clout. They don’t have it so we don’t have a banking union,” said Paul De Grauwe of the London School of Economics told the news agency Reuters.
“The whole idea was to cut the deadly embrace between bank and sovereign. But if a banking crisis were to erupt again, it would be back to how it was in 2008 with every country on its own.”
Following a meeting with the Parliament's negotiators and political group leaders, the Parliament's president Martin Schulz said that the compromise over the single resolution mechanism was an enormous success.
"This agreement is another major step towards restoring the stability of the eurozone and making it more immune to the crisis in the future. We need a strong banking union to break the negative feedback loop between sovereign debt and the health of the banking sector," he added.
Portuguese MEP Elisa Ferreira from the Socialists and Democrats group who led the talks on Parliament's behalf, noted that the deal has repaired many of the serious flaws in the initial Council position.
"I believe it is an improvement not only for the majority of MEPs but for many EU countries too. The mechanism as agreed will, I believe, be able to deliver the key goals for which it was intended. Certainly, this is not the end of the road and we must remain vigilant to ensure that the right implementing rules are laid down and that the fund's borrowing capacity will be translated into practice as rapidly and effectively as it needs to be."
The agreement struck at breakfast-time today after 12 hours of talks, will also protect the integrity of the single market, UK Conservative negotiator Vicky Ford MEP said.
"The new EU and international rules on recovery and resolution will make the financial world a safer pace. Taxpayers won't have to fund bailouts, as creditors can be bailed in and depositors are given preferential treatment to protect them," she added.
Sylvie Goulard (The Alternative, France), the ALDE spokeswoman on this dossier said: "Today we have shown what democracy means. Although the codecision procedure has put the European Parliament and the Council on equal footing, the Council announced last December that an agreement had already been reached. However, the truth is that a deal was only reached this morning with the Parliament. Under pressure from the Eurogroup President, Jeroen Dijsselbloem, who led the negotiations , ministers finally made concessions , taking into account the Parliament's demands."
Green economic and finance spokesperson Sven Giegold added: "This agreement undoubtedly provides for a more efficient and effective EU mechanism for winding down failing banks. As European Parliament negotiators, we have ensured significant improvements to core areas of the mechanism vis-a-vis what EU governments had wanted and extracted far more from German finance minister Schäuble than EU member states had. However, the insistence of EU governments that core elements of the system be dealt with through an intergovernmental agreement, as opposed to EU law, casts a long shadow over the deal."
At a summit in October last year, EU leaders agreed plans to complete the European banking union by January 2014, after the general elections in Germany.
The concession was made to German Chancellor Angela Merkel who argued for "quality" over "speed" in putting in place the new supervisory system, seen as a cornerstone of the EU's efforts to end the eurozone' sovereign debt crisis.
A new milestone in the EU’s efforts was reached in June when finance ministers struck an agreement on banking union that would force investors and wealthy savers to share the costs of future bank failures – or so-called ‘bail in’ – to shield taxpayers from unpopular bank bailouts.
The European Commission then tabled new proposals in July to complete the banking union with plans to establish a single euro zone authority to wind up failed banks – a move that fell foul with Germany.
- 20-21 March: EU summit in Brussels.