“Small” Step Forward for the European Banking Union

By Sam Obenhaus

European Union lawmakers struck an agreement with member states that will establish a single resolution mechanism for winding down banks in the event of their failure.  How to structure this authority has been debated for nearly two years.  European Union lawmakers generally support the creation of a centralized rescue fund while member states, most notably Germany, resist any efforts to pool resources into a pan-European Union bailout fund.  Germans fear they will be left on the hook for bailouts of non-German banks.

The agreement reached on Friday creates a bailout fund that will be capitalized by levies on banks.  While some of the money will be put in “national compartments” and not pooled, these divisions will be slowly phased out as the fund is capitalized over an eight-year period.  This is a major victory, at least in principle, for the European Parliament.

While the agreement is a breakthrough, the rescue fund’s €55 billion size strikes many as inadequate.  Another persistent concern is the mechanism’s complexity, which may make the proscribed wind-down process too slow and unwieldy to implement in the context of a financial crisis.

The Financial Times and Wall Street Journal have more on this story.