It is now six years since the beginning of the debt crisis that put the EU project in jeopardy. Greece, Ireland, Portugal, Spain and Cyprus fell one by one, and subsequent bailouts rocked the eurozone. History has a habit of repeating itself, but the EU is hoping to strengthen the eurozone’s banking sector by introducing a set of common rules and measures through a new European Banking Union.
“The main objective of the Union is to simply try and make the monetary union look more like a real monetary union,” explains Sharon Bowles, MEP for South East England and Chair of the European Parliament’s Economic and Monetary Affairs Committee. “In the UK, our central bank has the freedom to do what it likes in monetary policy terms and then tailor it to our currency. The eurozone isn’t one country. Following on from the sovereign debt crisis, the idea is to cut the link between sovereigns and banks. I think it is difficult to completely sever that link, but by reducing it, you avoid the vicious spiral of something untoward happening in a bank, which then destabilises the sovereign, which in turn destabilises the bank, and so on.”
The European Banking Union comprises three pillars: a Single Supervisory Mechanism, a Single Resolution Mechanism and a common deposit guarantee. The first places eurozone banks under the supervision of the European Central Bank (ECB), which will be given powers to closely observe the decisions taken by those banks. The ECB’s new role will be followed by the introduction of a resolution scheme, which will help bank crises be managed more effectively. The Single Resolution Mechanism states that if a bank in the eurozone is in need of rescue, a common resolution authority will manage the process of bailing it out – or closing it down if necessary – using funding from a levy on the banks. And eventually, a common deposit scheme will also guarantee up to a limit of €100,000 for anyone with an ordinary bank account in the eurozone.
Ultimately, there will be a shared fund, which will again help break the link between being a big, rich country that can save your banks, and being a small, poorer country that can’t
The ECB is due to take over the supervision of the eurozone’s banks in November of this year and will have the power to step in if a bank gets into trouble. It will monitor some 6,000 banks, and have direct supervision over those 130 eurozone banks with assets greater than €30bn. Countries in Europe which do not use the euro can opt in to the arrangements with the ECB should they wish to. However, Sharon believes it is unlikely that the UK will choose to enter into the agreement: “For a relatively large country outside of the eurozone like the UK, I’m not sure that the advantages outweigh the disadvantages because we have our own currency. It’s quite difficult for those not in the euro, if you like, to enjoy the full advantages of it.”
But she says the Union has been welcomed by the UK as it encourages stability, and a stable eurozone is always in the best interests of the UK economy. “It did create more of a ‘them’ and ‘us’ between the eurozone and non-eurozone countries, which is concerning if it is harming the single market. But this is a lesser evil than an unstable eurozone, and the UK has done a lot of work in the negotiations to ensure the single market and a level playing field are maintained.
“The UK has got branches and subsidiaries of banks that are in the banking union,” she adds. “For instance, Santander operates as a subsidiary in the UK. There is an interaction, and if there were ever the need for any kind of banking resolution, Europe is more intertwined than just the eurozone or the banking union, and you have to take account of what happens both in your own territory and outside. The UK did this when it was rescuing our banks during the crisis.”
Moving from national sovereignty to more economic integration is never easy, however, and the second pillar of the Union has caused much debate. Under the agreement made in December 2013, eurozone banks will be required to pay an annual levy for a national resolution fund. The fund will collectively be worth around €55bn and move from being national to centralised. There were numerous discussions on how quickly the fund would be mutualised, and Germany, already a big contributor to another EU bailout fund, was particularly concerned about this. But, under a draft agreement settled in March this year, it was confirmed that the fund will be built up over a period of eight years, and around 40% of it will be shared early on. New rules forcing the bondholders of banks to take on losses were also finalised.
“Ultimately, there will be a shared fund, which will again help break the link between being a big, rich country that can save your banks, and being a small, poorer country that can’t,” explains Sharon. “The money will come from the Bank Recovery and Resolution Directive, which is meant to be 1% of the banks’ assets minus other factors. It’s the same amount that every country has got to build and it is of a proportionate size to their banking system – the UK will have one, as well as other countries. But the idea is that the eurozone, instead of having 18 separate resolution funds, will have one that they share. That will help to make everything more stable.”
Sharon believes the Union should also make the eurozone more streamlined, as there will now only be one resolution authority instead of the previous 18. “The ECB will be the ultimate supervisor. European regulation as a whole is tighter in financial services now that a lot of it is done by way of regulation rather than a directive,” she says. “Everyone is confident that the ECB will stand up and be as strict as the Bank of England. There will be more market confidence in the fact that banking regulation is applied equally as strongly across the eurozone.
“Regulation is always for the single market. For the eurozone, with the exception of deciding how the ECB is going to provide this supervision, and there will also be the single resolution authority, all the rules are exactly the same as those applied in the UK by the Bank of England and the FSA. It’s not a different set of rules. It’s about protecting the single market to help ensure what we have seen in past doesn’t happen again.”
Only time will tell how strong the Union will be in the face of any future debt crises, but Sharon believes it is definitely a step in the right direction: “If we are talking about the whole project of the eurozone, including the banking union and what’s happened over the last five years, there has been a huge amount of repair work done to make it into something stronger. The fact that there will be better supervision, and work has been done on banks to improve their capital base, has already paid off to some extent, and I think it will continue to do so.”
Brett Jesson, Business Development – Financial Services, offers Equiniti’s view of the recent changes in Europe.
“Within the financial services sector, in the areas of retail banking, and life and pensions, there are three key factors that need to be thought about: legacy, customers and innovation. The European Banking Union’s additional regulatory requirements mean that regulation is being added onto organisations that already face significant challenges in terms of legacy technology and streamlining processes. The European Banking Union adds more pressure to the ability of any financial organisation when it should be focusing on delivering new products in an innovative way for its customers.
“Previously, reporting was required of the top 100 banks across Europe. Now, the top 1,000 banks will be required to report in a certain way to the ECB. Off-the-shelf packages can help with that reporting. Equiniti also has the capacity to factor in regulatory change and requirements in the way we contract and make commercial agreements with you. We will look at regulatory change as a partnership.”