Non-Eurozone €13trn
Eurozone €32.5trn

EU Bank Assets (2013)

In May 2013, bank assets in the EU totalled €45 trillion with €32.5 trillion in the Eurozone: equivalent to 349% and 342% of GDP respectively. Open Europe estimates that the Eurozone’s Single Resolution Fund may not be large enough to backstop the Eurozone’s banking sector.Source: European Central Bank

10 July 2013

The Commission’s SRM proposal for Eurozone banking union

The banking union is likely to form an important part of any solution to the Eurozone crisis – if one can be found – and the Single Resolution Mechanism (SRM) is a vital pillar of this.

However, the European Commission’s proposal as it stands now is likely to be too small; will not be implemented soon enough and will suffer from significant political opposition. It does not, therefore, have a realistic chance of ending the financial fragmentation plaguing the Eurozone. Furthermore, it also stretches the limits of the EU treaties, setting a worrying precedent for the UK and other non-Eurozone countries as it poses the risk that single market treaty articles can be used for purely Eurozone ends.

Even Germany has insisted that such a far-reaching proposal – which effectively alters the Eurozone architecture – requires treaty change, be it now or in the future. The Eurozone is yet to face up to the fundamental problem of reconciling the economic realities within the EU’s existing legal and political limits, and this proposal is another example of attempting to circumvent them in an ad-hoc way. As long as this approach continues uncertainty will plague the Eurozone.

Note: The EuropeanCommission has yet to publish the final text of the proposal, so this analysis is drawn from the information in the press release and the Q&A from 10 July 2013.

Where does the power lie under the Commission’s proposal?

Unsurprisingly, the  European Commission will keep final decision-making power, seeing fit to propose giving itself significant power with the single resolution authority incorporated under its purview. A Single Resolution Board (SRB) would be set up and would include representatives from the European Central Bank (ECB), the Commission, and the relevant national authorities involved in the resolution of a specific bank.

The ECB would maintain power to signal when it believes a bank requires resolution. The Commission would have final say (over all 6,000 banks which fall under the banking union), on whether resolution will take place and the format of any resolution plan. The SRB would advise but has no decision making power (according to the Commission this is due to legal issues that limit its ability to delegate power without altering EU treaties).

The Commission will also oversee the implementation of the recently announced Bank Recovery and Resolution Directive, which seeks to put more emphasis on bank bail-ins.

All this essentially means that under this proposal, the unelected Commission would reserve the right to wind down a large national or multinational bank, limited national democratic accountability. The SRB will, according to the Commission, be accountable to the European Parliament, while its Executive Director and Deputy-Executive Director of the Board would be appointed by the EU’s Council of Ministers following approval of the European Parliament.

Will the resolution fund be large enough to backstop the €33 trillion eurozone banking sector?

A Single Bank Resolution Fund (SBRF) will be set up and will equal 1% of insured deposits in the banking union, around €55bn. This will be built up by bank contributions over the course of 10 years. [1] How much, and the way in which each bank will contribute, is yet to be defined and may be set out in Commission delegated acts. This is a worrying precedent as it provides the Commission a significant amount of power to set the scope and nature of a financial levy without significant oversight.


Eu_bank_assets_as_percentage_gdp_2013EU Banks assets as percentage GDP 2013Source: ECB (Luxembourg is excluded, but bank assets stood at 2,958% of GDP)


As of May 2013, bank assets in the EU totalled €45 trillion, while in the Eurozone they totalled €32.5 trillion – this is equal to 349% and 342% of GDP respectively. [2]

Clearly, given the size of the banking sector this backstop seems short of being the necessary size. Open Europe has previously estimated that a fund would need to be around €500bn to €600bn to provide a viable backstop for a banking sector this size (in line with international comparisons and standards). [3] Importantly, most resolution funds are backed by a credit line or implicit guarantee from a treasury or national central bank. Absent this, serious questions remain over the viability of the fund and the SRB to act swiftly during a crisis.

Under the EC plans “no explicit” role is given to the ESM, the Eurozone bailout fund, which now has the ability to directly recapitalise banks using up to €60bn. This provides a further buffer, but given the significant hurdles to its use and the strict conditions, it seems unlikely to be tapped in anything but the worst crisis (as we have already noted).

Bail-in plans bear most of the burden under the banking union: A significant amount of emphasis is being put on the bail-in plans to bear the brunt of a resolution process. It is clear that a lower taxpayer burden is desirable. That said, the knock-on effects could be painful for the Eurozone in terms of higher bank funding costs. Furthermore, the potential for contagion in a crisis is clear.

Meanwhile, given the size of these funds relative to national banks, it is unlikely to be sufficient to break the sovereign banking loop, not least because bail-ins on domestically focused banks will have a significant impact on the national economy (still the purview of national governments).

Will the SRM be able to put the banking sector on a sounder footing?

SRM will not be in place for ECB stress test: The SRM will not be introduced until 2015 at the earliest. This raises serious problems for the up-coming bank asset quality review which will be conducted by the ECB at the start of next year. Without a clear backstop and mechanism for dealing with any bank capital shortfalls or restructuring, it is highly questionable whether the test will be robust for fear of sparking another round of contagion within the Eurozone (the ECB itself has hinted at this conundrum). [4]

Furthermore, on the timeline issue, it is unlikely there will be any significant movement ahead of the German elections at the end of September. With European elections in May and the European Parliament shut down by March, a deal would need to be in place by the end of this year – that will be tough given the controversial nature of the proposal.

Nonetheless, the Commission still reliant on national authorities: it has  limited expertise in hands-on management of the banking and financial sector – the IMF highlighted this to some extent in its evaluation of the Greek bailout. [5] It is unclear whether it will be able to sufficiently fulfil this role. It is likely to fall back on the existing expertise of the national authorities – however, this raises the same problem as that faced by the single supervisor (a principal-agent one). As this crisis has shown, national institutions may often have different goals to those of the Eurozone as a whole and may even find advantages in presenting a more optimistic outlook than the reality.

There are also practical questions over how crisis resolution would operate. The Commission can order the wind down of a bank and has the bail-in tools and the SBRF at its disposal. However, it is still reliant on national authorities for implementation and cannot impose any further fiscal cost on them. It is clear this tenuous arrangement could come under strain if a large bank needed to be resolved. There is still likely to be significant political and bureaucratic wrangling in any decision taken under the SRM, raising questions over whether it really succeeds in ending the ad-hoc approach to the crisis.

Will it require treaty change?

The European Commission suggests that its current plan is justified under the treaties although it does not rule out treaty change in the future.

The justification is that the creation of the SRM for the banking union (which is mainly a Eurozone policy) is a single market issue and it is therefore valid to transfer powers to the Commission using single market treaty article 114.

In the Q&A the specific justification below is also given:

The proposed Single Resolution Mechanism (SRM) would provide for an integrated decision-making structure aligning resolution under the SRM with supervision under the Single Supervisory Mechanism (SSM) to eliminate the competitive disadvantage that banks in the participating Member States in the SSM have compared to the non-participating Member States because of the lack of a centralised system to deal with banks in distress.

The argument is that banking union members (i.e. Eurozone members that are either unable to borrow or print their own currency to backstop their financial system) are disadvantaged within the EU-wide single market and this is justification for using a single market article in the treaty. This is a tenuous rationale and a huge legal stretch, and illustrates the limits the existing EU treaties set on greater Eurozone integration, which Germany has been at pains to point out (see below).

More worryingly for the UK and other non-Eurozone states, this is a potentially wide-ranging precedent that could mean significant changes explicitly designed for the Eurozone being pushed through under qualified majority voting on a single market treaty base. It would represent the worst fears that the Eurozone could write the rules of the single market for the rest of the EU. If changes such as the creation of a Eurozone bank resolution fund and new oversight system can be pushed through it is possible other more divisive measures may also be instituted.

Germany has come out swinging

German government is not pleased: Some reaction is already filtering through and it is fairly hostile as might have been expected. [6] At a press conference German Chancellor Angele Merkel’s spokesman Steffen Seibert argued:

In our view the Commission proposal gives the Commission a competence which it cannot have based on the current treaties…We are of the opinion that we should do what is possible on the basis of the current treaties [7].

Seibert added that the Commission’s proposal would require treaty change.

German banks do not support sharing resolution funds: A particular aspect which is likely to concern Germany is that votes would be taken by simple majority on the SRB, meaning no country would have a veto. Germany is not likely to be keen on this measure as it could see funds contributed by its banks being used to prop up those in other member states. This is highlighted by comments from Dr Gunther Dunkel, President of the influential VÖB (the German association of Public banks):

We reject the creation of a European resolution authority for many good reasons …it is not up for discussion for us, that funds gained through the work of German banks are used to contribute to the rescue of banks in other member states… [Furthermore] the SRM would require a change to the EU treaties to necessitate harmonised corporate, insolvency, and administrative procedural law.[8]

What exactly will happen from here is unclear. Germany and France have already put forward their preferred option of a network of national funds and authorities in the form of a resolution board, supplemented by the bail-in plans and the ESM. [9] There are suggestions that they may look to push ahead with this on an intergovernmental level rather than pursuing the Commission’s proposal.

German Finance Minister Wolfgang Schäuble has also recently hinted that he would be “forced” to take the Commission to the European Court of Justice if it tried to push ahead with a proposal opposed in Germany (which it seems this one is). [10]

It is clear that Germany is politically and legally constrained – this is unlikely to change after the election (especially the latter). Germany is keen to quickly push through a simpler system which would only require treaty change in the future. However, it is unlikely that the system proposed by Germany would do much better in terms of restoring financial integration.

This catch-22 between the need to act quickly and to the necessary extent but within the parameters of national politics and existing EU treaties is at the heart of the Eurozone crisis. This proposal shows that it is yet to be overcome.

How could this impact the UK and non-Eurozone countries?

The biggest potential impact on the UK and those outside the Eurozone/banking union would be the precedent this proposal could set if it is allowed to pass under a single market treaty base. It is clear that this is an solution designed to solve financial fragmentation within the Eurozone, which is a direct result of the way the currency union was originally constructed.

If the Eurozone is simply able to bend the meaning of the existing treaties as well as use the EU institutions for Eurozone, rather than EU-wide, interests, the fear is likely to be where does this stop?

Importantly, Germany is insisting that such a far-reaching proposal – effectively constructing a new architecture for the Eurozone – requires treaty change (be it now or in the future). This is consistent with David Cameron’s stated belief that changes in the Eurozone will require the EU to revise its treaties, providing an opportunity for the UK and non-Eurozone states to ensure the integrity of the single market and potentially seek safeguards.

In practical terms the direct impact should be limited. The banking union is open to non-euro members and only those that take part would be subject to this proposal. For those outside, bank resolution will continue to work as defined by the BRRD. For multinational bank resolutions which cross the euro border the existing process of negotiations in the European Banking Authority and special ‘resolution colleges’ will continue to apply – far from a comprehensive format, but likely a workable one.


[1] This may be extended to 14 years if funds are paid out in the interim.

[2] Figures for bank assets are from May 2013 and are taken from the ECB’s statistical data warehouse. Figures for GDP are for the end of 2012 and are taken from Eurostat.

[3] For more detail see our previous paper on the banking union, ‘A Eurozone banking union: a game of two halves’, December 2012

[4] MNI, Draghi: Backstops Will Be In Place Before Asset Quality Review, 4 July 2013

[5] IMF, Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By  Arrangement, June 2013

[6] Bloomberg, EU Unveils Bank-Failure Plan in Face of German Opposition, 10 July 2013

[7] MNI, Germany Rejects EU Plan For European Bank Resolution Board, 10 July 2013

[8] Presstext, VÖB lehnt Einheitlichen Abwicklungsmechanismus ab, 10 July 2013

[9] Bundesregierung, Press Release: France and Germany – Together for a stronger Europe of Stability and Growth, 30 May 2013

[10] Dow Jones, Schäuble: Kämpfe mit aller Kraft eine EU-Abwicklungsbehörde, 19 June 2013