Europe took the final step to complete a banking union on Thursday with an agency to shut failing euro zone banks, but there will be no joint government back-up to pay the costs of closures.
The breakthrough ends an impasse with the European Parliament, which persuaded euro zone countries to strengthen the scheme. It completes the second pillar of banking union, which starts at the end of the year when the European Central Bank takes over as watchdog.
The accord means that the ECB has the means to shut banks it decides are too weak to survive, reinforcing its role as supervisor as it prepares to run health checks on the still fragile sector.
ECB President Mario Draghi said that plans to allow the new ‘resolution’ or clean-up fund to borrow to top itself up looked promising and that the decision-making scheme to shut a bank had been streamlined.
“The point we’ve always made that we need a mechanism that is properly funded and the agreement actually improves the existing funding,” Draghi told journalists as he entered a meeting of European Union leaders.
“All in all we made progress for a better banking union.”
Michel Barnier, the European commissioner in charge of regulation, said the scheme would help to bring “an end to the era of massive bailouts”.
“The second pillar of banking union will allow bank crises to be managed more effectively,” he said.
Thursday’s agreement makes it harder for EU countries to challenge the ECB if the central bank triggers bank closures, and establishes a common 55 billion euro back-up fund over eight years – quicker than planned but far longer than the ECB’s watchdog had hoped.
But the new system, which Barnier conceded was not ‘perfect’, has shortcomings.
For one, the ‘resolution’ fund is small and would, in the view of the ECB watchdog, be quickly spent. To remedy that the fund will be able to borrow to replenish spent money.
Euro zone governments will not, however, club together to make it cheaper and easier for it to do so.
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