Thursday 20 March 2014 9:21 pm

Surprise last minute deal on banking union

EUROPE’S banks will fund a new bailout fund more quickly than expected, under a deal struck in the early hours of yesterday morning. The Single Resolution Mechanism (SRM) is the latest step of the banking union plans slowly being negotiated in Brussels. There were fears the European Parliament and EU Council would not be able to reach the deal before the parliamentary elections in May, which could then have changed political priorities for the groups. The SRM is designed to create a common rescue fund to deal with the costs of any future bank collapse in the Eurozone, and will see banks build up a fund of €55bn (£45.9bn) over the next eight years. The scheme is designed to protect governments from the cost of bailing out their countries’ failed banks, and dragging down sovereigns as well as financial institutions. As part of that scheme governments will mutually backstop the SRM, meaning they will agree to pay the bills regardless of the bank’s location. This mutualisation had been a major sticking point – Germany’s government in particular had been wary of agreeing to bail out other states’ banks. By contrast France had been keen on the scheme. Under the deal 40 per cent of the SRM’s assets will be mutualised in the first year, 60 per cent in two years, 70 per cent in three and 100 per cent in eight years’ time. Lawyers were cautiously optimistic that the deal will end the risk of contagion between failed banks and struggling governments “It was widely acknowledged that the Single Supervision Mechanism would not achieve the stated objective of banking union – to break the “doom loop” between banks and their sovereigns – without the SRM,” said Mayer Brown’s Alexandria Carr. “There will be many people waiting to pour over the detail of the agreement and to see whether the apparent compromise has achieved a practical, effective, robust and legally certain SRM.” THE SINGLE RESOLUTION MECHANISM Banks will have to pay for a rescue fund for the industry. It will come to around €55bn – one per cent of insured deposits. That is because the main focus when a bank collapses is protecting individuals and small businesses. If the fund is in place beforehand it should be quicker and easier to use when a bank is in trouble. Under the banking union, regulators under the European Central Bank will decide when to begin rescue or winding down procedures, removing much political influence. Individual governments will also be protected because they are collectively providing a backstop to the fund. The hope is that this will stop a government like Greece’s getting into trouble when its banks go bust, instead sharing the burden. The rules still need formal approval by the European Parliament and EU member states, coming into force on 1 January 2015.