Gold Magazine June - July 2013, Issue 27 | Page 94

banking union

{economy}

Future bank resolution through

Franco-German eyes

Opposition to a strong and interdependent framework for the repair and
recapitalisation of eurozone banks dominates By Kyproula Papachristodoulou
German Chancellor’s meeting with
the French President
is in every other way resembling
previous meetings
between Merkel
and Nicolas Sarkozy

O

nce again Berlin has
been imposing its ideas
of what a banking “union” in the context of
a European “Union”
would mean on France.
Ironically, it has being doing so with the
backing of France. After a meeting between
German Chancellor Angela Merkel and
French President François Hollande, which
in every other way resembled previous meetings between Merkel and Nicolas Sarkozy, the
two leaders distributed a detailed document
setting out their vision on issues currently
troubling the eurozone.
In the document, the German view that
there should not be a strong and interdependent framework for the repair and recapitalisation of eurozone banks dominates. This is
strongly at odds with a proposal being prepared by the European Commission and the
wishes of the European Central Bank. Experience has shown, however, whose position will
prevail in the end.
Under the Franco-German plan, bank
bailouts would be handled by a “single reso-

The French stance has
found support in Brussels
lution board involving national resolution
authorities”. This formulation is significantly
different from the original intention of the
EU authorities as presented when the idea of
a “banking union” was launched last year.
ECB officials have been particularly concerned about leaving control of bank cleanups to national authorities. The concern
is that the ECB will have the authority to
declare that a eurozone bank is insolvent but
it will have no power to do anything about
it except exert pressure on national governments to do something. Berlin has publicly
disagreed with the ECB, saying that current
treaties do not give the EU authority to perform bank bailouts on its own and that the
legal authority must only come after the treaties are changed.
The German-French view came as no
surprise. German Finance Minister Wolfgang
Schäuble had pre-announced their stance in
an opinion piece published on 13 May in the

92 Gold the international investment, finance & professional services magazine of cyprus

Financial Times advocating a “two-step approach” towards a European banking union,
He wrote that a limited “timber-framed” union, set up without changing European treaties, would buy time to create a future “steelframed” union. While today’s EU treaties
provide “adequate foundations” for putting
in place a new pan-European bank supervisor
and a single resolution mechanism to wind
down bankrupt banks, “they do not suffice
to anchor beyond doubt a new and strong
central resolution authority,” he wrote. The
rescue of Cyprus has shown that shareholders
and creditors need predictability when winding up a bank, he explained, stressing that
“those affected will seek redress” and that “a
solid legal base” was needed to address this.
So what is the French contribution in the
German-French banking union plan? French
officials – as reported by the international
press – insist the “resolution board” is an
important step further to what Berlin had
originally envisaged. They argue that the creation of a board is closer to what the Commission had originally planned, i.e. a resolution
authority, rather than to the initial German
wish for cooperation among a network of
national central banks. The French stance has
found sup port in Brussels. According to media reports, the European Commission supported the view that the joint agreement allows for “decision-making at the central level”
– something Berlin appeared to previously
oppose. “It was never planned, nor would it
be possible, to eliminate the national authorities from the system,” said one Commission
official, according to the FT, arguing that the
document also appears to give them leeway to
propose a single European bailout fund. The
implementation of the so-called “direct recapitalisation” – where the ESM would inject
cash directly into failing financial institutions
– which was the cornerstone of a deal reached
last June among EU leaders, now looks as
doubtful. Under the German-French deal,
such a plan will be put off until agreements
on more incremental banking regulations are
completed.