European banking union: how it works

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IOL bus mar20 Mario Draghi Reuters The banking union was shaped in part by European Central Bank President Mario Draghi. File photo: Ralph Orlowski

Brussels - Europe struck a deal on Thursday to complete a banking union with an agency to shut failing euro zone banks, but there will be no joint backstop for a fund to pay the costs of closures.

Following are key facts about the agreement.

What is banking union?

Banking union was shaped in part by Mario Draghi, the president of the European Central Bank, but it falls short of his vision.

In 2012, he described it as a European deposit insurance guarantee, a European fund to cover bank closures and a central supervisor for banks.

Only ECB supervision has gone fully to plan. Although there will be a fund to pay for bank closures, it is small, without euro zone backing and will take years to build. Common deposit insurance has been long ditched.

How does it work?

The process of shutting a bank will be started by the ECB but the process is complex, involving the new 'resolution' agency, the European Commission and possibly even ministers from member countries.

It is hard for countries to prevent an emergency bank closure at the last minute. In reality, because the ultimate responsibility for a failed bank remains with its home country, imposing order on laggard banks will remain intensely political.

Why has it been introduced?

Governments were forced to pour trillions of euros into their banks to keep them alive during the financial crisis. Banking union should prevent that happening again.

Spain and France had hoped it would see the burden of bad banks spread across the shoulders of the entire euro zone, including economic powerhouse Germany.

But Berlin believes the key to the new regime is not a common back-up fund but new rules to imposes losses on bondholders and other creditors of failed banks as happened in Cyprus. Only afterwards would the fund be needed.

Strong-arming governments into taking such steps may prove difficult because it can rebound on their own credit rating.

When does it start?

The ECB will become the supervisor of banks at the end of this year. The agency to shut banks and the fund will be launched shortly afterwards.

Germany has always insisted that 'bail-in' rules forcing losses on creditors would come into force then, which means they could be applied if a bank is condemned to closure in ECB health checks this year.

Reuters



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