Sunday, May 18, 2014

17/5/2014: That costly alphabet soup behind the European Banking Union

Two main building blocks of the Single Resolution Mechanism for future banks bailouts in the EU involve Deposit Guarantee Scheme Directive (DGSD) and the Bank
Recovery and Resolution Directive (BRRD). The issue at hand is funding the future bailouts.

The EU Member States are required to establish two types of financing arrangements:

  • BRRD sets up the Resolution Fund to cover bank failure resolution. This will be used after 8% of losses gets covered by the bail-in of depositors and some funders.
  • DGS covers deposits up to EUR100,000 in the case of a bank failure. 

There are several issues with both funds. For example, DSG funds (national level) will have to run parallel with the EU-wide Eurozone Single Resolution Fund (until the DSG pillar is integrated at a much later date into EBU). This implies serious duplication of costs over time and creation of the 'temporary'  but long-term national bureaucracy / administration which will be hard to unwind later.

By 2016, EA18 euro area members will have national DSG running parallel to EU18-wide single resolution runs (SRM) which cannot be merged together absent (potentially) a treaty revision, not EA-18 EU members will have national DSG and national resolution fund, which can be merged together.

What is worse is that national contributions to DSG cannot count toward national contributions to the resolution fund (SRM or in the case of non-EA18, to national resolution funds). This means that total national banking system-funded contributions to both funds will be 0.8% of covered deposits for DSG, plus 1% for SRM = minimum of 1.8% of covered deposits. Ask yourselves the simple question: given that banking in majority of the EU states is oligopolistic with high (and increasing) concentrated market power, who will pay these costs? Why, of course the real sector - depositors and non-financial, non-government borrowers.

It is worth noting that the 1.0% contribution to the resolution fund will cover not just covered deposits, but actually is a function of liabilities. In other words, it will be much larger proportion of covered deposits than 1%.

That is a hefty cost of the EBU and this cost will be carried by the real economy, not by financialised one. The taxpayers might get off the hook (somewhat - see here: but the taxpayers who are also customers of the banks will be hit upfront. And who wins? Bureaucrats and administrators who will get few thousands new jobs across the EU to manage duplicate funds, collections and accounts. The more things change… as Europeans usually say…

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