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Surprise! It’s Not the EUrozone Crisis Anymore. Welcome to the EU, LLC. It’s Still a Crisis.

Well, it’s [1] offi­cial (pend­ing approval [2]). The ‘sec­ond pil­lar’ [3] of the EU’s bank­ing union — a 55 bil­lion euro bail-out fund and a bunch of new rules — appears to be in place fol­low­ing recent nego­ti­a­tions. It was an all night com­pro­mise ben­der! [4] Yes, lots of com­pro­mis­es were made, but the core prin­ci­ples that have emerged dur­ing the EU’s mul­ti-year-long quest [5] for a bank­ing union are still intact. Those prin­ci­ples being, of course:

1. Bail-ins by depos­i­tors and cred­i­tors should be expect­ed for bank fail­ures before the bail-out fund is tapped. In oth­er words, it’s the ‘Cyprus Solu­tion’ of bail-ins [6] for the entire EU so it’s poten­tial­ly fair­er to small­er nations in that respect.

2. The bank­ing union can’t be too for­giv­ing. Nations with ail­ing banks should have the min­i­mal help need­ed to avoid a com­plete cat­a­stro­phe. The joint bank bail-out fund should­n’t be large enough to actu­al­ly solve a large bank­ing cri­sis. Small­er nations should still remain dis­pro­por­tion­ate­ly vul­ner­a­ble because the bailout fund, itself, will be so small that any seri­ous crises will quick­ly over­whelm the fund and leave the remain­ing lia­bil­i­ties on the indi­vid­ual nation. At that point, it’s troi­ka-time! [7]

3. The euro­zone mem­ber nations, which are pre­sum­ably more inclined to a mutu­al pool­ing of lia­bil­i­ties giv­en the shared cur­ren­cy, will not actu­al­ly share those lia­bil­i­ties in the event that the bail-out fund is spent even though that was a cen­tral tenet of the orig­i­nal bank­ing union idea.

4. Banks should­n’t be allowed to treat their nation­al debt as ‘risk-free’, a move intend­ed to min­i­mize the ‘bank-sov­er­eign nexus’ where domes­tic banks load up on domes­tic gov­ern­ment debt because it’s giv­en favored ‘risk-free’ sta­tus. It’s been a pro­pos­al cham­pi­oned by Bun­des­bank chief Jens Wei­d­mann [8]. As Greece demon­strat­ed, sov­er­eign bonds in the EU aren’t nec­es­sar­i­ly ‘risk free’ because bond­hold­ers just might be forced to take a trip to the bond-bar­bor­shop [9]. In the­o­ry, pre­vent­ing risk-free sov­er­eign bonds should pre­vent the con­cen­tra­tion of a nation’s debt in its own bank­ing sys­tem. In real­i­ty, it might accom­plish that goal, but it will prob­a­bly also exac­er­bate any exist­ing “sov­er­eign debt bank nexus” prob­lems if imple­ment­ed poor­ly and gen­er­al­ly goes against the spir­it of a real “union” [10] by empha­siz­ing a “each mem­ber is on its own” atti­tude.

5. The min­i­mal­ly help­ful plans should be hailed as a tri­umph of com­pro­mise, prac­ti­cal­i­ty, and fair­ness.

Yes, the sec­ond pil­lar in the EU’s bank­ing union is a tri­umph of com­pro­mise, prac­ti­cal­i­ty, and fair­ness [11]:

Europe strikes deal to com­plete bank­ing union

Thu Mar 20, 2014 8:33pm GMT

(Reuters) — 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.

...

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.
...

Notice that the com­pro­mis­es include estab­lish­ing the 55 bil­lion euro bail out fund in eight years, which is soon­er than expect­ed but far longer than the ECB’s new watch­dog [12] had hoped. It rais­es the ques­tion of the time frame the ECB’s Watch­dog would have pre­ferred for the full fund­ing of the too-small fund? 5 years? 3 years? Now?

Con­tin­u­ing...

...
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.

The 18 euro zone coun­tries do not intend to cov­er joint­ly the cost of deal­ing with indi­vid­ual bank fail­ures, a cen­tral tenet of the orig­i­nal plan for bank­ing union.

Ger­many resist­ed pres­sure from Spain and France to make such a con­ces­sion. Its finance min­is­ter Wolf­gang Schaeu­ble wel­comed new rules forc­ing bank cred­i­tors to take loss­es and that “the mutu­alised lia­bil­i­ty ... remained ruled out” — a ref­er­ence to shar­ing the bur­den of a bank col­lapse.

Nei­ther will there be any joint pro­tec­tion of deposits.

DEADLY EMBRACE

Almost sev­en years since Ger­man small busi­ness lender IKB became Europe’s first vic­tim of the glob­al finan­cial cri­sis, the region is still strug­gling to lift its econ­o­my out of the dol­drums and banks are tak­ing much of the blame for not lend­ing.

The bank­ing union, and the clean-up of banks’ books that will accom­pa­ny it, is intend­ed to restore their con­fi­dence in one anoth­er. It is also sup­posed to stop indebt­ed states from shield­ing the banks that buy their bonds, treat­ed in law as ‘risk-free’ despite Greece’s default in all but name.

Under the deal reached, a fund made up by levies on banks will be built up over eight years, rather than 10 as orig­i­nal­ly fore­seen. Forty per­cent of the fund will be shared among coun­tries from the start and 60 per­cent after two years.

It also envis­ages giv­ing the Euro­pean Cen­tral Bank the pri­ma­ry role in trig­ger­ing the clo­sure of a bank, lim­it­ing the scope for coun­try min­is­ters to chal­lenge such a move.

Mark Wall, Deutsche Bank’s chief euro zone econ­o­mist, said new rules to impose loss­es on the bond­hold­ers of trou­bled banks would reduce the bur­den on the fund but warned that its size was too mod­est. “A cross-Euro­pean fund of the size of 55 bil­lion rais­es some eye­brows in terms of scale,” he said.

The fund will be able to bor­row against future bank levies but will not be able to rely on the euro zone bailout fund to raise cred­it. Crit­ics say this means pri­ma­ry respon­si­bil­i­ty for prob­lem lenders remained with their home coun­tries and that the bank­ing union will nev­er live up to its name.

“The key to the bank­ing union is an author­i­ty with finan­cial clout. They don’t have it so we don’t have a bank­ing union,” said Paul De Grauwe of the Lon­don School of Eco­nom­ics.

“The whole idea was to cut the dead­ly embrace between bank and sov­er­eign. But if a bank­ing cri­sis were to erupt again, it would be back to how it was in 2008 with every coun­try on its own.”

...

Let’s review some of the details being pro­posed:
— A 55 bil­lion euro bailout fund is being cre­at­ed from levies on banks. The CEB Watch­dog say this is much too small and could be spent quick­ly.

- It will take 8 years for the fund to be ful­ly financed, less than the planned 10 years but much longer than the ECB watch­dog was hop­ing for.

- The 55 bil­lion euro fund can bor­row against future blank levy’s but it can’t rely on the euro­zone bailout fund (which makes sense since this bank­ing union includes euro­zone and non-euro­zone mem­bers).

- And, due pri­mar­i­ly to Ger­man oppo­si­tion, the 18 euro­zone mem­bers states are not going to be joint­ly fund­ing for the bailouts, even though joint fund­ing was one of the orig­i­nal cen­tral tenets of the bank­ing union. There will also be no joint pro­tec­tion of deposits (it’s the third pil­lar of the bank­ing union, so some scheme involv­ing). So the small­er nations or those with weak­er economies should prob­a­bly be expect­ing some sort of troi­ka fol­low­ing any future major finan­cial crises.

- Once the 55 bil­lion euro fund is exhuast­ed, “it would be back to how it was in 2008 with every coun­try on its own”.

The More Things Change, the More They Stay the Same In the Bank­ing Union. Via Veto Pow­er
If the above plan does­n’t sound very like­ly to suc­ceed keep in mind that there’s noth­ing pre­vent­ing cor­rec­tive changes to the bank­ing union in the future. Except for the veto-pow­er of indi­vid­ual mem­ber states. Yes, because this was an inter-gov­ern­men­tal agree­ment, indi­vid­ual mem­bers need to agree to future changes and hold an implied veto pow­er. So while the bank­ing union may be here to stay, it does­n’t have to stay the same. But it eas­i­ly could [13]:

Finan­cial Times

A high­ly imper­fect bank­ing union
Euro­zone banks and sov­er­eigns remain tight­ly embraced
March 23, 2014 5:01 pm
Edi­to­r­i­al

Twen­ty months ago, at the height of the sov­er­eign debt cri­sis, EU lead­ers vowed to shore up the eurozone’s finan­cial sys­tem by build­ing a “bank­ing union”. The aim was to end the dead­ly embrace between gov­ern­ments and banks that had proven cat­a­stroph­ic for coun­tries such as Spain and Ire­land. Nev­er again would a sin­gle mem­ber state have to deal with a bank­ing cri­sis alone, as its part­ners would help by shar­ing some of the bur­den.

Last week the jour­ney towards the EU’s most ambi­tious inte­gra­tion project since the cre­ation of the euro came to an end [14]. After a 16-hour nego­ti­a­tion, the Euro­pean par­lia­ment and mem­ber states agreed to cre­ate a uni­fied sys­tem for han­dling bank­ing crises. The so-called “sin­gle res­o­lu­tion mech­a­nism” is one of the build­ing blocks of a bank­ing union. The oth­er cor­ner­stone – remov­ing from nation­al reg­u­la­tors the pow­ers to super­vise the eurozone’s largest banks and attribut­ing them to the Euro­pean Cen­tral Bank – had already been laid last year.

Con­struct­ing a bank­ing union was always going to involve uneasy com­pro­mis­es between states. Ear­ly in the nego­ti­a­tions it became clear that Ger­many was opposed to the idea of build­ing a com­mon guar­an­tee scheme that would pro­tect small depos­i­tors in case of a bank fail­ure. But while this part of the plan was aban­doned, the hope was that the oth­er ele­ments of the bank­ing union would not be watered down. Alas, the oppo­site has hap­pened.

...

Most impor­tant­ly, the promise that euro­zone mem­bers would share the bur­den of res­cu­ing or resolv­ing a bank has been for­got­ten. True, the exten­sive use of “bail-in” rules means that bond­hold­ers will final­ly face the true cost of the risks they take. But after that the finan­cial respon­si­bil­i­ty for sav­ing a bank will large­ly fall on the shoul­ders of an indi­vid­ual gov­ern­ment. As for banks that need to be shut down, at just €55bn the com­mon res­o­lu­tion fund is tiny and, any­way, will take eight years to build.

One would wor­ry less about these imper­fec­tions if it were clear that the agree­ment would be improved at a lat­er stage. But this will be dif­fi­cult. For exam­ple, since the sin­gle res­o­lu­tion fund was includ­ed in an inter-gov­ern­men­tal agree­ment, mem­ber states will retain veto pow­ers over sub­se­quent changes. Ger­many, which is ter­ri­fied of any­thing that involves a mutu­al­i­sa­tion of lia­bil­i­ties, is unlike­ly to give much ground.

The euro­zone risks being stuck with a flawed bank­ing union until the next cri­sis. This places a greater onus on the ECB. The cen­tral bank is under­tak­ing a foren­sic audit of the bal­ance sheets of the insti­tu­tions it will super­vise to ensure they hold enough cap­i­tal. This assess­ment must be cred­i­ble and put the largest banks in posi­tion to with­stand the next shock. After this week’s defi­cient agree­ment on bank­ing union, any mis­take risks being extreme­ly cost­ly.

Yes, “since the sin­gle res­o­lu­tion fund was includ­ed in an inter-gov­ern­men­tal agree­ment, mem­ber states will retain veto pow­ers over sub­se­quent changes. Ger­many, which is ter­ri­fied of any­thing that involves a mutu­al­i­sa­tion of lia­bil­i­ties, is unlike­ly to give much ground.”. And if Ger­many isn’t giv­ing much ground, ground prob­a­bly isn’t going to be giv­en at all. That just how things work. It’s the implied sixth prin­ci­ple of the bank­ing union:

6. He who has the gold makes the rules.

So does this implied veto right by mem­ber nations mean that a clear­ly ques­tion­able bank­ing union is now the law of the land? Indef­i­nite­ly? Well, per­haps, but that does­n’t mean there aren’t oth­er pos­si­ble pos­i­tive changes com­ing as a result of the new union. For instance, one of the unam­bigu­ous pos­i­tives to the new ‘bad bank’ res­o­lu­tion scheme is that it takes us one step clos­er to resolv­ing the the pre­vi­ous ‘bad bank’ res­o­lu­tion schemes. As Berlin recent­ly made clear, those pre­vi­ous real­ly bad [15] ‘bad bank’ res­o­lu­tion schemes that bank­rupt­ed entire coun­tries and man­dat­ed troikas aren’t going to get resolved until the entire bank­ing union is set up. So, as bad as many the new bank­ing union seems with the announce­ment of these new pro­pos­als, at least it gets us clos­er to undo­ing the last hor­ri­ble bank­ing scheme [16]:

Irish Times
Ger­many damp­ens hopes of Irish bank recap­i­tal­i­sa­tion from ESM
Schäu­ble rules out mutu­al lia­bil­i­ty of EU mem­ber states

Suzanne Lynch, Derek Scal­ly

Fri, Mar 21, 2014, 01:00

Ger­many has damp­ened expec­ta­tions of immi­nent bank recap­i­tal­i­sa­tions for Irish banks from the Euro­pean Sta­bil­i­ty Mech­a­nism bailout fund after yesterday’s agree­ment on a fur­ther pil­lar of the Euro­pean bank­ing union.

After 16 hours of talks through the night, Euro­pean Union mem­ber states and the Euro­pean Par­lia­ment agreed final details of a sin­gle res­o­lu­tion mech­a­nism (SRM) to wind up fail­ing banks.

Taoiseach Enda Ken­ny wel­comed yesterday’s agree­ment as anoth­er “essen­tial” stage in the euro area’s post-cri­sis path towards a bank­ing union.

“This means that we’re mov­ing towards the endgame in terms of hav­ing the struc­ture put in place by which mat­ters of recap­i­tal­i­sa­tion can be con­sid­ered,” he said, speak­ing on his way into a sum­mit of EU lead­ers in Brus­sels. “And, as I’ve always said, that will apply on a case-by-case basis by the end of the year.”

Ger­man finance min­is­ter Wolf­gang Schäu­ble agreed that yesterday’s deal marked a “great step for­ward for Europe” on the bank­ing union, which he described as the “great­est Euro­pean pro­jec­tion since the intro­duc­tion of the euro”.

Mutu­al lia­bil­i­ty ruled out
While the polit­i­cal deal rep­re­sent­ed a sen­si­ble com­pro­mise, with Berlin giv­ing ground on key points, Mr Schäu­ble insist­ed that it “still rules out mutu­al lia­bil­i­ty of par­tic­i­pat­ing mem­ber states”. Berlin offi­cials were cir­cum­spect about the time it would take to com­plete the bank­ing union’s final lap. For now, they said, Berlin’s pri­or­i­ty was “pour­ing the SRM deal into a con­crete struc­ture”.

“Only then can we look fur­ther,” said a finance min­istry spokesman.

After agree­ment in Decem­ber 2012 on a sin­gle super­vi­so­ry mech­a­nism for banks, the SRM is the sec­ond of three pil­lars of Europe’s bank­ing union with talks still out­stand­ing on a third: a com­mon deposit insur­ance fund. Until all three are in place, and the bank­ing union is oper­a­tional, Berlin declines to enter­tain even dis­cus­sion of recap­i­tal­i­sa­tions. The idea of estab­lish­ing a com­mon Euro­pean bank­ing deposit insur­ance fund is high­ly unpop­u­lar both with Ger­man banks and Ger­man savers and is like­ly to trig­ger a pro­longed polit­i­cal debate there.

...

Note that the Ger­man Con­sti­tu­tion­al Court very recent­ly ruled that a direct recap­i­tal­i­sion of Ire­land banks would indeed be con­sti­tu­tion­al [17], remov­ing a major hur­dle to this need­ed step. But don’t expect any recapil­i­sa­tions any time soon since, as men­tioned above, Berlin is declin­ing to enter­tain even dis­cus­sion of bank recap­i­tal­iza­tions until all three pil­lars are in place for the new bank­ing union. And the third pil­lar — deposit insur­ance — has yet to even be addressed and is like­ly to trig­ger a pro­longed debate. So the Ire­land, the ‘good stu­dent’ that has been hold­ing out for recap­i­tal­i­sa­tion for years, is going to have to keep wait­ing [18].

Con­tin­u­ing...

...
Late-night hag­gling
Yesterday’s agree­ment between mem­ber states and the Euro­pean Par­lia­ment under the co-deci­sion process fol­lows agree­ment among mem­ber states in Decem­ber. The cen­tralised res­o­lu­tion body and accom­pa­ny­ing €55 bil­lion fund will be respon­si­ble for wind­ing-up strug­gling banks.

After late-night hag­gling, includ­ing a report­ed 5.30am phone call to Mr Schäu­ble, euro-group pres­i­dent Jeroen Dijs­sel­bloem emerged with a deal at 7am.

It has been seen as favour­ing small­er coun­tries such as Ire­land because it accel­er­ates the pace at which the €55 bil­lion fund will be ful­ly mutu­alised. (The first SRM draft pro­pos­als envis­aged a 30 per cent mutu­al­i­sa­tion in the first three years, with full mutu­al­i­sa­tion only after a decade.)

This was one cru­cial con­ces­sion Euro­pean Par­lia­ment nego­tia­tors wrung from Ger­many; anoth­er was reduc­ing from 10 to eight years the tran­si­tion peri­od dur­ing which a pool of nation­al funds would shift towards a shared fund.

Mutu­al­i­sa­tion
The revised pack­age also brings for­ward mutu­al­i­sa­tion: 40 per cent in the first year; 20 per cent in the sec­ond year; and the rest equal­ly over a fur­ther six years.

Accord­ing to Dutch MEP Cori­enn Wort­mann-Kool the result­ing res­o­lu­tion process will treat banks equal­ly regard­less of their home coun­try.

“We want bail-in of cred­i­tors and investors to be applied in the same way to all banks irre­spec­tive of the mem­ber states these banks are locat­ed in,” she said, using the exam­ple of Ire­land as com­pared with larg­er states such as Ger­many and France.

The plan agreed by mem­ber states in Decem­ber would have seen, for exam­ple, French or Ger­man banks backed by a large fund allow­ing mod­er­ate bail-ins. An Irish bank with a small­er nation­al fund would, under draft pro­pos­als, have been forced into a deep­er bail-in, lead­ing to high­er fund­ing costs, she said.

“This would def­i­nite­ly not be what we want to achieve in terms of break­ing the link between sov­er­eign and bank­ing debt,” she said.

The agree­ment also envis­ages that the Euro­pean Com­mis­sion, rather than mem­ber states, will approve deci­sions made by the SRM’s board on resolv­ing banks. MEPs were anx­ious to lim­it polit­i­cal inter­fer­ence from mem­ber states, though finance min­is­ters will still have pow­er to inter­vene in cer­tain cas­es.

...

So it’s bad, but not all bad, right? At least it was­n’t “def­i­nite­ly not be what we want to achieve in terms of break­ing the link between sov­er­eign and bank­ing debt” like the pro­posed plan in Decem­ber was [19] where the larg­er mem­bers would have larg­er bail-out funds. Instead, every­one shares in the too-small-too-suc­ceed bailout fund.

The EU’s ‘Mutu­al’ Fund Has ‘Eye-Open­ing’ Non-Mutu­al Ben­e­fits
Addi­tion­al­ly, notice how the ‘com­pro­mise’ is being spun as “favour­ing small­er coun­tries such as Ire­land because it accel­er­ates the pace at which the €55 bil­lion fund will be ful­ly mutu­alised.” As the arti­cle points out:

...
The plan agreed by mem­ber states in Decem­ber would have seen, for exam­ple, French or Ger­man banks backed by a large fund allow­ing mod­er­ate bail-ins. An Irish bank with a small­er nation­al fund would, under draft pro­pos­als, have been forced into a deep­er bail-in, lead­ing to high­er fund­ing costs
...

What does this mean? Well, basi­cal­ly, the 55 bil­lion euro bailout fund isn’t ful­ly fund­ed or ful­ly “mutu­alised” for 8 years. There’s a tran­si­tionary phase of 8 years when the fund builds up. Dur­ing this phase the funds are sep­a­rat­ed between “nation­al” funds and “Euro­pean funds” and mon­ey in each nation’s “nation­al” com­part­ment is only avail­able for bail­ing out that nation’s bank. In oth­er words each mem­ber is sort of on their own when it comes to deal­ing with a bank­ing cri­sis dur­ing this tran­si­tion peri­od. But the degree to which a coun­try is on its own will go down each year as the fund grows in size and become increas­ing­ly “mutu­al­ized”. But, again, it’s going to take 8 years for this process to be com­plet­ed and 8 years can last a LONG time when you’re in the midst of some sort of socioe­co­nom­ic exper­i­ment gone hor­ri­bly awry [20].

So the recent changes made in the com­pro­mise agree­ment real­ly would reduce the risk assumed by the small­er states because that’s what mutu­al­i­sa­tion does. By speed­ing up the over­all time frame from 10 to 8 years and by speed­ing up the mutu­al­i­sa­tion sched­ule from the 10 year sched­ule pro­posed in Decem­ber it real­ly does reduce sys­temic risk (oth­er­wise insur­ance would­n’t real­ly work). So this is quite an accom­plish­ment, right?

Well, as we already saw above [13], mutu­al­i­sa­tion is indeed help­ful but that help­ful­ness is dra­mat­i­cal­ly lim­it­ed by the fact that the bailout fund is lim­it­ed to 55 bil­lion euros.

Sure, 55 bil­lion euros sounds like a lot of mon­ey, but keep in mind the Ire­land, alone, spent 85 bil­lion euros bail­ing out its pri­vate banks [21] and this basi­cal­ly bank­rupt­ed the coun­try (require an addi­tion­al bailout and end­less austerity...and the ongo­ing need for recap­i­tal­i­sa­tions). Por­tu­gal need 78 bil­lion euros [22]. Once that 55 bil­lion euro bailout fund is expend­ed the lia­bil­i­ties fall back on the mem­ber nations. So bailouts are mutu­alised, but only to an extent that would have been inad­e­quate for deal­ing with vir­tu­al­ly ALL of the crises we’ve seen thus far.

Still, we can be a bit relieved that the new­ly pro­posed bailout fund scheme is an improve­ment over the pro­pos­al in Decem­ber. By push­ing up the fund­ing sched­ule from 10 to 8 years and increas­ing the mutu­al­i­sa­tion rates the new scheme is prob­a­bly fair­er over­all. At least, it’s hope­ful­ly a fair­er arrange­ment between the larg­er nations (like Ger­many and France) and the small­er states like Ire­land.

As the fol­low­ing arti­cle points out, how­ev­er, there’s still a ques­tion of fair­ness between the larg­er states. Yes, in what turned out to be quite an “eye open­er” last week, it looks like France, and not Ger­many, will be pay­ing more into the bailout fund than any­one else and “mutu­al­i­sa­tion” will dra­mat­i­cal­ly bring down Ger­many’s over­all share for the 55 bil­lion euro fund. Giv­en the intense oppo­si­tion by Ger­man nego­tia­tors to the very idea of mutu­al­i­sa­tion, this was­n’t the expect­ed out­come [23]:

Finan­cial Times

March 17, 2014 4:41 pm
France and Ger­many squab­ble over who pays for EU bank­ing union

By Alex Bark­er in Brus­sels

France and Ger­many are squab­bling over who should foot the bill for Europe’s bank­ing union, with Paris fear­ing its banks will pay the biggest share towards a €55bn res­cue fund.

As the EU enters a poten­tial­ly deci­sive week in talks on a cen­tral sys­tem for han­dling bank crises, France is fight­ing plans to make its sec­tor of big uni­ver­sal banks the lead­ing con­trib­u­tors to the com­mon insur­ance plan.

It is one of sev­er­al high­ly polit­i­cal issues that remain unre­solved with days left before a Wednes­day dead­line to agree leg­is­la­tion with the Euro­pean par­lia­ment, so that it has time to pass before the Euro­pean elec­tions.

Although it is high­ly tech­ni­cal, the dis­pute over the bank levy cuts across some fraught EU issues: whether the res­cue sys­tem is gen­uine­ly Euro­pean or actu­al­ly part­ly nation­al; whose bank­ing sys­tem is most risky; and there­fore whose lenders should pay more for insur­ance. France, Spain and Por­tu­gal have all sub­mit­ted papers on the top­ic.

One senior diplo­mat said the break­down of con­tri­bu­tions was an “eye open­er”, giv­en that Ger­many, the EU’s biggest econ­o­my, is lead­ing resis­tance to increas­ing the heft of the res­cue fund or accel­er­at­ing its mutu­al­i­sa­tion.

“Every­one put up with [Germany’s] antics because they thought it was the Ger­man banks that pay by far the most, but that isn’t quite true. It is the French banks that will fund this par­ty,” the offi­cial said.

Some MEPs think it right that com­plex, “too big to fail” banks pay more. Sven Giegold, a Ger­man Green in the par­lia­ment nego­ti­at­ing team, said he was “appalled” by mem­ber states’ attempt­ing to rig the cal­cu­la­tion, to “give a sub­sidy to risky banks”.

A French infor­mal posi­tion paper, cir­cu­lat­ed on Fri­day, lays out rough esti­mates show­ing the vari­ance in nation­al con­tri­bu­tions depend­ing on the method used. One big fac­tor is whether the fund­ing tar­get – expect­ed to be around 1 per cent of cov­ered deposits – is set at Euro­pean lev­el or nation­al lev­el.

Under a Euro­pean tar­get France’s high­ly con­cen­trat­ed bank­ing sec­tor, includ­ing BNP Paribas and Société Générale, is on the hook for 21 per cent of the fund, slight­ly more than Germany’s more deposit fund­ed sec­tor.

By con­trast, if the tar­get is set at nation­al lev­el, the con­tri­bu­tions of Ger­man banks would rise to 35 per cent, while France’s remain at 21 per cent. Berlin fought hard to lim­it the con­tri­bu­tions of its big sav­ings bank sec­tor to the cen­tral fund.

France argues that giv­en the fund is estab­lished with nation­al com­part­ments that are grad­u­al­ly bro­ken down over 10 years, the Euro­pean tar­get lev­el should also be phased in. This would leave French banks pay­ing 21 per cent, or around €11bn, while Ger­man lenders would pay 28 per cent, around €15bn.

“Using a ref­er­ence to nation­al tar­get lev­el dur­ing the tran­si­tion­al peri­od is con­sis­tent with the exis­tence of nation­al com­part­ments,” the French paper argues, point­ing out that a fail­ing bank’s access to res­cue funds varies accord­ing to its home state.

...

That might have seemed like a lot of jar­gon. Here’s the crit­i­cal part:

...
Under a Euro­pean tar­get France’s high­ly con­cen­trat­ed bank­ing sec­tor, includ­ing BNP Paribas and Société Générale, is on the hook for 21 per cent of the fund, slight­ly more than Germany’s more deposit fund­ed sec­tor.

By con­trast, if the tar­get is set at nation­al lev­el, the con­tri­bu­tions of Ger­man banks would rise to 35 per cent, while France’s remain at 21 per cent. Berlin fought hard to lim­it the con­tri­bu­tions of its big sav­ings bank sec­tor to the cen­tral fund.

France argues that giv­en the fund is estab­lished with nation­al com­part­ments that are grad­u­al­ly bro­ken down over 10 years, the Euro­pean tar­get lev­el should also be phased in. This would leave French banks pay­ing 21 per cent, or around €11bn, while Ger­man lenders would pay 28 per cent, around €15bn.
...

Keep in mind that the above arti­cle was writ­ten days before the lat­est deal, so the ear­li­er bailout fund sched­ule was still on the table (10 years for financ­ing the fund and slow­er mutu­al­iza­tion) but the over­all dynam­ic described has­n’t changed with the new deal. Now notice the point made by the French nego­tia­tors at the time: The bailout fund is estab­lished with nation­al com­part­ments that are bro­ken down and merged into the “Euro­pean” com­part­ment as the fund gets mutu­alised. If the con­tri­bu­tions where set at the “nation­al tar­get lev­el”, Ger­many’s bank­ing sec­tor would be on the hook for 35% of the 55 bil­lion euro fund. But at the “Euro­pean lev­el” the Ger­man banks are only liable for 20% of the fund. The French banks, on the oth­er hand, appear to be on the hook for 21% either way. So, some­how, the for­mu­la used for the “mutu­al­i­sa­tion” of lia­bil­i­ties seems to dra­mat­i­cal­ly slash the Ger­man lia­bil­i­ties with­out impact­ing the French bank­ing sec­tor at all. Banks can have dif­fer­ent struc­tures and risks, so this isn’t entire­ly sur­pris­ing that the for­mu­las cho­sen can have dif­fer­ent impacts on dif­fer­ent bank­ing sec­tor. But, again, the oppo­si­tion to debt mutu­al­i­sa­tion has been the strongest in Ger­many and yet, in the end, debt mutu­al­i­sa­tion appears cut the Ger­man lia­bil­i­ties by 42%! It helps explain why this scheme was such an ‘eye open­er’.

You Say Mutu­alise, I Say Mutu­al­ize. Let’s Call the Whole Thing Off All Cre­ate A Lim­it­ed Lia­bil­i­ty Com­pa­ny
Still, our eyes should­n’t be too wide with sur­prise by the new EU bank­ing New Deal and its quirky fund­ing for­mu­las because it was­n’t sim­ply “mutu­al­i­sa­tion” of the bail-out fund that Ger­many has been oppos­ing this entire time. It’s the “mutu­al­i­sa­tion” of ALL poten­tial lia­bil­i­ties that Berlin has been fear­ing.

Sure, the “mutu­al­i­sa­tion” of the 55 bil­lion euro fund appears to reduced Ger­many’s bailout lia­bil­i­ties for the 55 bil­lion euro fund, but that’s not where the major sav­ing for Ger­many are accrued. The major reduc­tion in Ger­man lia­bil­i­ties (and the lia­bil­i­ties of any lead­ing Euro­pean economies in the future) come from the fact that the “mutu­al­i­sa­tion” of lia­bil­i­ties is capped at 55 bil­lion euros. That’s the major ‘eye-open­er’ in this plan because once that 55 bil­lion euro bailout fund gets used up noth­ing else gets mutu­al­ized and the rel­e­vance of the bank­ing union effec­tive­ly ends. The EU, at the end of the day, is a lim­it­ed lia­bil­i­ty com­pa­ny for nation states. That’s the uni­fy­ing prin­ci­ple under­ly­ing the bank­ing union. My Broth­er’s Keep­er, LLC.

And why kind if bank­ing union “cri­sis res­o­lu­tion” pow­er will a nation state LLC have? One that appears to inten­tion­al­ly cre­ate of a scheme that is unable to han­dle any­thing oth­er than a small, sin­gle-nation bank­ing cri­sis cou­pled with a very seri­ous threat of “Troi­ka Time! [24]” for any mem­ber states that that find them­selves in need of nation­al bailout. In oth­er words, it’s a pre­ven­ta­tive approach. The EU’s new plan for deal­ing with a cri­sis is to have a bank cri­sis res­o­lu­tion scheme that is so com­plete­ly inad­e­quate that mem­ber nations will pre­emp­tive­ly cur­tail excess­es in their bank­ing sys­tems sim­ply to avoid the pos­si­bil­i­ty of need­ing a nation­al bailout (and more Troi­ka [25] time­outs [26]). It’s the ‘all stick, no car­rot’ approach [27] to cre­at­ing a union.

But will it work? Can it work? After all, we’re talk­ing about a bank­ing union with­in a Euro­pean union. Can unions root­ed in con­flicts of inter­est, a lack of trust, and a deep aver­sion to bur­den-shar­ing actu­al­ly sur­vive in the long run? If so, is a lim­it­ed lia­bil­i­ty com­pa­ny real­ly the kind of long-term rela­tion­ship the EU wants to be [28]?

Would­n’t the E-“U‑and-Me” be bet­ter?