A breakthrough agreement between lawmakers from the European Parliament and EU member states on a resolution mechanism for failed banks was reached on the evening of December 11. The EU settled on the Single Resolution Mechanism according to which private investors in banks and the banking sector as a whole will be required to bear the consequences of banks’ losses but still leaves room for governments to launch bailouts. The Bank Resolution and Recovery Directive will be applied across the EU from 2015 onwards and bail-in rules for senior bondholders should take effect in 2016, two years earlier than originally established by EU finance ministers in June. "We have come a long way", said Wolfgang Schäuble, the German Finance Minister, and added that there was a common agreement that if banks "get into difficulty, then it will not be the taxpayer but the investors and creditors that bear the costs".
Under the deal, banks will be rescued with privately funded resolution funds and public funds will only be triggered in a minority of extreme and suitably justified cases. Resolution funds financed by banks will thus have to be established and funded up to a level of 1% of covered deposits within 10 years. Although the Directive lays down more flexibility to recapitalize banks with public money, interventions will only be possible under defined conditions and EU approval. In order to protect SMEs and small investors, deposits under €100.000 are entirely exempted from any loss and deposits of natural persons and SMEs above €100.000 will benefit from a preferential treatment.
Obstacles to the EU plan included the desire on the part of member states to introduce rules allowing governments to inject public money into failed banks since the European Parliament wanted to limit the use of government stabilization tools to emergency situations. As a compromise the agreement stipulates that the nationalization of a banks can only happen in exceptional circumstances. A precautionary recapitalization of a solvent bank that meets minimum capital requirements will also be possible, but not before EU approved stress tests. The European Banking Authority will be responsible for the determination of the rules for such interventions. Michel Barnier, the European Commissioner for Internal Markets and Services in charge of these reforms, said this "big step" would ensure that "failing banks can be wound down in a predictable and efficient way with minimum recourse to public money", which is now crucial to restore confidence in the European financial sector.
On December 17, EU finance ministers are expected to sign off on the agreement ahead of the EU summit to be held on December 19 and 20 where European leaders should ratify the banking union to be implemented and enter into force on January 1st 2015.
Yet, Guillaume Prache of EuroFinUse believes that “as long as policy makers in Brussels remain utterly obsessed with ‘financial stability’ - a euphemism for bailing out big banks at any price - rather than with shoring up the real economy, no amount of negotiations will come even close to addressing the worries of end users”. As it stands the SRM may well end up as a complicated mixture between bail-in and bail-out instruments - funded at the national and euro area levels - in which shareholders and bondholders will be required to take on the bulk of the burden of saving a bank.
Whereas this may to some extent safeguard the taxpayer, the costs caused by the greed of financial institutions will have to be borne by exactly those European households that we rely upon for long term investments in the real economy. And, lest we forget: the European taxpayers and the European savers are the same people, they are the European citizens.