After a marathon negotiating session, European Union lawmakers this week reached a compromise on the method for winding down failing banks in the bloc, a contentious yet crucial piece of the planned EU banking union.

The Single Resolution Mechanism (SRM) would be triggered by the supervisor of the European Central Bank (ECB), based on either the recommendation of the ECB itself or the appointed Resolution Board, according to information released by European Parliament following the deal. The broader banking union initiative also is housed under the ECB, and virtually all major banks in the EU will fall under its supervision. SRM was the last major piece of the banking union. Under the agreement, the European Commission, which would have a role in designing resolution schemes to address specific failing banks, and the European Council would be able to object to specific resolution plans.

The legislation, subject to months of intense negotiations and rhetoric, became embroiled in a tug-of-war between lawmakers who believed the SRM authority needed to be centralized in Brussels, especially the power to trigger a bank wind-down, and the council and Member States wanting a greater role. Members of Parliament were concerned too much involvement from Member States would bog down the process and also politicize it.

Also controversial was how the process would be funded. The compromise struck this week calls for giving the bank-financed Single Resolution Fund the ability to borrow, with details to be nailed down later. The goal of the fund is €55 billion, reaching at least 1 percent of covered deposits over eight years. The fund initially would consist of so-called national compartments, corresponding to each Member State, with mutualization of those compartments over eight years. That mutualization would take place with 40 percent in its first year, 20 percent in the second year, and the remainder equally in the subsequent six years, according to parliament and the commission.

MEP Elisa Ferreira of Portugal, who put forward parliament's position during the 16-hour negotiating session, said she was pleased with the end result.

“This deal has repaired many of the serious flaws in the initial Council position and I believe it is an improvement not only for the majority of MEPs but for many EU countries, too,” Ferreira said in a statement. “The mechanism as agreed will, I believe, be able to deliver the key goals for which it was intended. Certainly, this is not the end of the road and we must remain vigilant to ensure that the right implementing rules are laid down and that the fund's borrowing capacity will be translated into practice as rapidly and effectively as it needs to be.”

MEPs are hoping to pass the legislation during their last plenary session next month before the current parliament's term expires. The goal is to have SRM take effect January 2015, with bail-in and resolution mechanisms beginning in January 2016.

The long-running battle over SRM led to a back and forth between Internal Market and Services Commissioner Michel Barnier, who tried to instill a sense of urgency in passing the legislation during this parliamentary session, and MEPs, who argued that no law would be better than a “bad law.” After the agreement was reached, Barnier praised “the spirit of compromise” and the hard work of the co-legislators involved.

The SRM agreement “represents a major step towards the alignment of both banking supervision and banking resolution at a central level, whilst involving all relevant national players,” Barnier said in a statement. “Backed by an appropriate resolution funding arrangement, and an acceptable decision-making process, this second pillar of the banking union will allow bank crises to be managed more effectively. In case of cross-border failures, it will be much more efficient than a network of national resolution authorities and will help to avoid risks of contagion.”

Barnier added that SRM “might not be a perfect construction,” but will be more effective and faster in resolving cross-border bank crises. He said he believes the now-completed banking union will put an end “to the era of massive bank bailouts.”

Barnier and Daniele Nouy, who was appointed head of the ECB's bank supervisor arm in December, urged lawmakers to compromise at an Economic and Monetary Affairs Committee meeting earlier in the week. Nouy reiterated the need for the resolution board to be able to make quick decisions.

“To put it in simple terms, when a house is on fire, the fire brigade should not have to wait until the city council has agreed on whether and how to intervene,” Nouy told MEPs at the hearing. “It should be able to go out immediately when the fire has broken out. And just like an effective fire brigade needs access to water and reliable water hoses, the SRM needs ready access to a resolution fund to be able to conduct a resolution over one weekend.”

The compromise reached addressed those concerns, streamlining the decision-making process in order to allow for a resolution scheme to be approved within a weekend.

 

 

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