EU closer to banking union; Hungary on the fence

The ECOFIN Council reached agreement on the single resolution mechanism, the second leg of a banking union, at a meeting on December 18. This provides a base to start negotiations on the SRM with the European Parliament. The council expects the proposal to be adopted before the European elections in May 2014.

The SRM will form one of the key elements of Europe’s projected banking union, along with the single supervisory mechanism that should become operational by fall 2014. The SRM would enter into force on January 1, 2015. Bailout and resolution functions would apply from 2016. The SRM will cover all countries participating in the single supervisory mechanism, namely the euro area member states and those non-eurozone countries that decide to join the SSM. 

The banking union will not be a closed club. It will be mandatory for euro area countries with its approximately 6,000 banks, but it is also open to all non-euro EU member states that want to join, although none have thus far expressed an interest to do so. Denmark and Romania seem to be willing, while the UK and Sweden do not want to be part of it. The other Central and Eastern European countries, Bulgaria, Czech Republic, Hungary and Poland, are also reluctant (Slovakia and Slovenia are within the euro area and thus have no choice). European Commission officials hope that once a decision is made on the SRM and the SSM has been up and running for a period, some of these countries will decide to join. 

The single rulebook, the foundation of the banking union, is applicable in all 28 member states, therefore the standards applied in terms of supervision and resolution should be the same. The difference is that within the euro area, there are more integrated institutions and mechanisms within a more integrated framework. 

Wait and see
Hungary’s approach is to wait until the whole picture is available. Commenting on banking union after the EU summit in December, PM Viktor Orbán said that Hungary is not a eurozone member and more details need to be assessed before the country’s parliament makes a decision on whether to join.

Orbán added that he called on the economy minister at the end of last November to prepare a banking resolution bill similar to that of the EU’s banking union. Regardless of whether Hungary joins the union, it will be necessary to have regulations at a national level to protect Hungarian taxpayers from having to bear the consequences of banks’ mismanagement.

Toward a banking union
The 2008 financial crisis and the 2011 eurozone debt crisis exposed weaknesses in the EU’s financial sector, and the EU heads of state and government agreed to set up a banking union in June 2012. The main underlying reason given for establishing banking union was “to break a vicious circle between banks and sovereigns”. 

Based on the financial regulatory framework of the 28 EU members, the single rulebook, the EC proposed a roadmap towards banking union. The first element was the establishment of the SSM, which entered into force in November 2013. Under the SSM, responsibility for bank supervision in the euro area will shift from national authorities to the European Central Bank.

The ECB is currently carrying out a balance sheet assessment of the 128 biggest banks that will be under its direct supervision, coupled with a stress test in close cooperation with the European Banking Authority. The asset quality review of the banks, due to be completed in the spring, is already underway.

Ultimately, a third element of the union is a common deposit guarantee scheme to protect savings, but this is not currently on the agenda. Instead, the priority is to reach an agreement on a common network of national deposit guarantee schemes.