Reuters: EU leaders leave critical issues on banking union unanswered

19 October 2012

EU leaders have agreed to allow the ECB to supervise banks from next year, but questions remain about how the process will work, which lenders will be involved, and whether those in trouble can be helped. (Includes quote from Graham Bishop.)

At a meeting of EU leaders that ended on Friday, issues such as what method will be used to accommodate non-euro nations that join the scheme, how many banks the ECB will directly supervise, and whether that can lead to countries sharing the cost of resolving problems were left undecided.

Investors are following the negotiations closely in part because they expect cross-border supervision to allow the eurozone rescue fund, the European Stability Mechanism (ESM), to inject capital directly into struggling lenders... Merkel signalled, however, that a further element of a banking union would first need to be in place before that can happen, namely the establishment of a resolution fund, and cautioned that direct aid would not cover existing problems.

"The critical question is whether the recapitalisation by the ESM of bad banks or problems of the past is possible", said Graham Bishop, an adviser to banks on European financial policy. "That has not been answered."

Ultimately, a banking union is expected to establish financial backstops or central funds, paid into or guaranteed by banks or governments, to back problem lenders and shield savers. But such steps are a long way off.

Establishing a unified deposit-guarantee scheme would be a major stumbling block, with Germany regarding a single guarantee as akin to the mutualisation of eurozone debt - something it firmly opposes. The idea appears to have been dropped for now. Setting up a scheme for the resolution or winding up of troubled banks could be similarly problematic.

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