There is no shortage of crisis fighting tools coming through the EU legislative pipeline: national and central resolution funds; powers to write down creditors in ailing banks and common funds that can be injected directly into a weak institution.
The dilemma is that even if they are agreed, as far as the ECB-led stress tests are concerned, the tools will be either incomplete (in the case of bail-in powers), not financed (resolution funds) or so encumbered by conditions as to be pointless (direct recapitalisation of banks). “We are very happy about the cavalry coming up the hill but there are some horses failing to make it up the hill", a senior European official said.
Such concerns are prompting policy-makers to look at rewiring the ESM to provide transitional funding for the banking union’s nascent institutions. Under one option being discussed, an ESM subsidiary would offer financing to new national or central resolution funds, which are supposed be created in 2015 but will take years to build up resources. Such loans have the advantage that they would be repaid through a levy on banks and EU Member States, avoiding the strict conditions that come with ESM sovereign loans. However they would need changes to ESM treaties.
Ultimately any decision to release funds would also require unanimity – meaning the backstop would be subject to a veto from Germany, Finland or other countries reluctant to underwrite a bill for other countries’ mistakes. Further complicating matters, non-eurozone countries such as Poland, which might join the Banking Union, are seeking a similar backstop, creating a serious political quandary.
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