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Legislators reached a deal on the Single Resolution Mechanism (SRM), the second phase of the Banking Union, after sixteen hours of negotiation that began on the afternoon of Wednesday 19 March and ended with German Finance Minister Wolfgang Schauble being roused shortly before dawn to give his blessing to the agreement. Subject to final approval, the text will now be put to a plenary vote on 15 April.

The European Parliament maintained that it would rather have no deal - and subject the SRM to uncertainty and delay - than approve a bad deal. This view was widely held; a poorly constructed SRM that doesn't function in practice would undermine the credibility of the Banking Union. So was Thursday morning's agreement a good one and has it answered any outstanding questions about the credibility of the Banking Union as a whole?

The European Parliament was able to extract two important concessions that represent a considerable improvement to the Council position agreed in December. Firstly, the Parliament managed to simplify the resolution procedure by limiting the role of the plenary of the Single Resolution Authority. The plenary,  where each participating Member State has a vote is more prone to political interference and thus risks preventing a quick resolution process. Under the final deal, the executive board, which consists only of Member States with a direct interest in a resolution decision, will take the majority of decisions until a claims threshold of €5 billion is reached over a period of twelve months. This amendment should allow for swift resolution decisions to be taken in the majority of cases.

The second significant amendment is the creation of the resolution fund. The Council had proposed establishing national funding compartments rather than a single fund as proposed by the European Commission. The Parliament has been able to accelerate the speed at which these funds are merged, with 70% of the funds being combined after three years and full mutualisation after eight. This goes some way towards addressing concerns that the cost of resolution will continue to fall on Member States, thus failing to meet one of the primary objectives of the Banking Union to sever the link between the bank and sovereign.

A final extraction from the Parliament was to commit the Council to establish a credit line for the resolution fund rather than leave room for this to be voluntary. The Parliament was unable however, to prise discussions on how to establish the credit line away from the Council, which points to the broader reason why this agreement can only be considered an improvement on the Council position rather than a good deal. The Council has continuously sought to avoid a situation in which a Member State can access the common fund without first bearing heavy penalties domestically. Their monopoly on the construction of the credit line means that it is unlikely to become the backstop that was envisaged for the SRM. Similarly, the Council is in the process of deciding how the ESM can be used as a direct financing instrument. This too, is likely to be constructed in such a way as to deter its use in all but the most extreme circumstances.  

Speaking to the ECON committee on 18 March, incoming chair of the Single Supervisory Mechanism,  Daniele Nouy said that the complicated resolution procedure proposed by the Council was akin to a fire service first having to enter into a convoluted consultation procedure with the local council before receiving permission to put out a fire. This concern may have been addressed but the question still remains of when there is a large fire, whether the fire service will be able to access enough water.

Does this mean that the credibility of the Banking Union is still not assured? The answer is almost certainly yes but it may not be because of the funding issue alone. With the Banking Union structures in place, Member States will no longer have to muddle through if another banking crisis emerges. While the funds may be difficult to access as long as economic conditions are benign, were a systemic threat to arise then Member States will be far better placed to contain it.

An equally important question remains over the creation of the Single Supervisory Mechanism that becomes operational in November. The ECB is undertaking a rigorous Asset Quality Review (AQR) that is expected to identify banks that are under-capitalised. The AQR and subsequent stress tests will therefore pit the ECB against national authorities if they require actions to be taken against certain banks. The SSM can only work if it is clear that it has full control over banks within scope. If the ECB is thought to have ducked difficult decisions or been unable to exert influence over Member States then the credibility of the supervisor and the Banking Union as a whole will be in doubt.  

The resolution fund is important and the deal an improvement but it is only one of the issues where the Banking Union poses uncomfortable questions regarding Member States and their sovereignty.

Launching "The Danger of Divergence: Transatlantic Financial Reform & the G20 Agenda"

Published by: John Cooke in Regulation and trade on 18 February 2014
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Friday 14 February saw a TheCityUK hat-trick, with the London launch of the Atlantic Council’s Report "The Danger of Divergence: Transatlantic Financial Reform & the G20 Agenda".  Coming after the Brussels launch in the European Parliament (12 February) and the earlier launch on Capitol Hill in Washington DC (29 January) this third launch event (at Thomson-Reuters, Canary Wharf) was the culmination of a concerted effort between the Atlantic Council (as producers of the Report) and Thomson-Reuters and TheCityUK (as joint sponsors) to ensure maximum attention for a timely contribution to transatlantic debate.

Balance of Competences Review: Report on Trade & Investment

Published by: John Cooke in Financial services in the UK on 18 February 2014
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Heralded by good tidings (“Whitehall studies see benefits of Europe”) in the day’s Financial Times, last Friday saw the publication of the Reports arising from the Second Semester of the Government’s Review of the Balance of Competences between the UK and the EU.  These were  – after some delay – eight of the expected reports, covering the Internal Market (free movement of goods); Asylum & Immigration; Trade & Investment; Environment; Transport; Research & Development; Tourism, Culture & Sport; and Civil Justice.  One remaining report - Internal Market (free movement of persons) – is not being published yet, and is said to be likely to be unveiled in some weeks or months, maybe coinciding with the release of Third Semester Reports.

Without Financial Services, the TTIP could be made to look a Monkey

Published by: Richard Normington in Regulation and trade on 05 February 2014
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The home of Senatorial inquiries for over fifty years was the site of TheCityUK’s first presentation on Capitol Hill.  Unlike the venue of last month’s TheCityUK evidence session at the House of Lords, United States Senate Room SD-562 was one of the first purpose-built, press and TV-friendly, hearing rooms of its kind in the world.

Did Ireland’s W B Yeats foresee the financial crisis?

Published by: John Cooke in Regulation and trade on 05 February 2014
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It’s always interesting to visit another EU member-state, particularly one presenting a degree of contrast with the United Kingdom both in size and in attitudes to the EU.  This time TradeWonk visited Ireland - to be exact Sligo, in Ireland’s far west, for the W B Yeats Winter School.  Yeats himself of course had plenty to say about crises, although in “The Second Coming” he may or may not have had twenty-first century financial turmoil particularly in mind:

Attracting and retaining talent

Published by: Rebecca Greeves in Financial services in the UK on 31 January 2014
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Attracting and keeping the best people is crucial in the financial and professional services industry. These issues are certainly central to NGV’s aims for the future of the UK’s financial sector: growing companies that are connected to and an integral part of their communities. But in the market for talent, the UK’s sector is competing with global opportunities and growth industries such as technology and engineering.

The UK and the EU - Winning Friends and Influence

Published by: John Cooke in Financial services in the UK on 31 January 2014
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The Financial Times’ reflective weekend leaders always make for interesting reading – none more so than the thoughtful piece headed “The City and the European Union” on Saturday 25 January.  Coming at the end of a week in which the European Court of Justice upheld EU rules on short-selling against a UK challenge, and the House of Lords returned the EU Referendum Bill to the Commons, the Financial Times sought to find a point of balance in the arguments, making the point that “London’s advantages as a financial centre were never down to the light-touch regulation of the boom years, and tougher rules will not dull the attractiveness of the sort of finance the UK should wish to host.  Since the crisis Britain has been at the forefront of regulatory reform, intellectually and in practical terms. Brussels is less likely to weigh on UK regulators to be tough on banks than it is to force other countries to catch up with UK standards”.

Britain is the only country – so far - with a building named after Free Trade. Could Capitol Hill be the next? For services, it really matters.

Published by: John Cooke in Regulation and trade on 20 January 2014
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Irwin Stelzer’s article in yesterday’s Sunday Times “Free Trade is a boon but there’s no votes in it” was a sobering reflection on the choices and chances besetting Trade Promotion Authority (TPA) as it starts its way through both Houses of the US Congress.  Introduced ten days ago (9 January) the Bill, if enacted, would ease the way for the US Administration to conclude the Trans-Pacific Partnership, (TPP), the EU-US Transatlantic Trade and Investment Partnership (TTIP) and the Trade in Services Agreement (TISA).

Is it better for the City if Britain remains in the EU?

Published by: Chris Cummings in Financial services in the UK on 20 January 2014
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Just how important is the EU debate to the City of London?  Extremely, judging by the crowd who packed into Fishmongers Hall first thing this morning, to listen to a panel discussion on that very topic. I spoke on a panel at Newgate Communications’ seminar alongside UKIP leader Nigel Farage, Conservative MEP Dr Charles Tannock and the Daily Telegraph’s Peter Oborne. The Chairperson, Newgate’s  Eben Black, posed us a simple question: is it better for the City if Britain remains in the EU or leaves it?

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