When officials in Brussels unveil new proposals on Wednesday to give the EU’s banking regulators summary powers to wind up failing banks – while keeping taxpayers off the hook – they will cast them as an “embryonic” version of the much vaunted “banking union”.
But the European commission’s long-awaited proposals to overhaul the rules governing how banks die is less salvation from the immediate eurozone crisis than a good example of the political obstacles to integrating EU bank rules into such a union.
The tools given to regulators to force senior bank bondholders to bear the pain of any failure are radical and intended to help prevent the next crisis. The details were so sensitive that their publication has been delayed for a year, for fear of making it prohibitively expensive for banks to raise funds.
But the reform plan is conservative in one sense: it still works within the tramlines of jealously guarded national powers to oversee national banks.
While José Manuel Barroso, the commission president, has joined the chorus of support for an EU-wide banking union, this proposal works within current EU treaties. Europe still awaits a masterplan for a single EU supervisor, deposit guarantee scheme and resolution authority.
For some analysts, this fails to grasp the urgency of the situation facing the eurozone, particularly in Spain.
“Has the commission got a vision?” asks Karel Lanoo of the Center for European Policy Studies. “We need to have an EU-wide deposit guarantee scheme and fast. It is the only way to support cross-border banking. They have just left it in the hands of member states. That is weak.”
At the margins, the proposal does challenge some national taboos over sharing the burden of insuring bank deposits, suggesting that governments must lend to each other’s deposit guarantee schemes in a financial emergency.
It also introduces sweeping powers from 2018 to write down senior unsecured creditors in banks – a so-called “bail-in” that would spare taxpayers some of the burden of rescuing institutions that are too big to fail.
But it does not attempt to overturn the convention that national authorities remain in control of their own banking systems and are responsible for underwriting the system as a last resort.
That national monopoly on power and fiscal responsibility is exactly the problem bedevilling the eurozone, as it attempts to break the vicious cycle of cash-strapped states attempting to rescue their cash-strapped banks.
Regulators now are struggling with the reality that banks are international in life yet national in death. But nations such as Germany or the UK have proved unwilling to cede sovereignty or share the risks of underwriting an EU system.
The rhetoric is shifting. There are hopes that these sacrifices will be made in the heat of the current crisis. But concessions in the European commission’s final proposal on bank resolution give an indication of how strong those national pressures still remain.
Early drafts called for banks to raise a minimum level of debt that can be written down, equivalent to 10 per cent of their liabilities – an imposed rule that would be typical in a banking union.
But the provision was dropped from drafts after lobbying from banks and ministers, so that national authorities maintain discretion over how tough to be on their banks.
Similarly, the plan for a more joined-up network of national deposit guarantee schemes, which must lend to each other in an emergency, goes no further than an existing commission proposal that is now two years old.
But a clear majority of EU member states rejected the idea of lending to bail out depositors in other countries – objections that have helped stall the first attempt at reforms.
EU officials are quietly optimistic that opposition to more burden sharing is softening. “I’m not sure member states would keep the same position today,” said one EU official. But Germany remains wary that this is a backdoor route to underwriting Spanish or Italian bank deposits.
Officials are looking at more ambitious steps. The commission proposal could become the legal vehicle for closer integration should member states suggest more ambitious amendments.
Some bank resolution measures could also be added to the more advanced draft law on capital requirements, which will fast-track implementation.
But there are doubts that these small steps will be a match for the short-term eurozone challenge. Mr Lanoo recommends that EU states activate an existing treaty provision to give the European Central Bank authority to supervise eurozone banks.
“They need to act quickly. The whole thing is falling apart,” he said.