The consumer came out ahead last week and the banks were put in their proper place when the European Parliament reversed decades of implicit national guarantees for failed banks and passed a legislation to create a European banking union. The three key planks of the new European Union (EU) banking union move power away from the EU national governments and their financial supervisors who have been far too lax with their failed lenders in recent years.
The legislation requires all member states to have common rules guaranteeing deposits, a new procedure consistent across all states in the banking union for putting a failing bank out of its misery, which will not allow the sweetheart deals that far too many banks got in the past few years, and now bond holders as well as shareholders will be made to suffer from losses, which will add more pressure on management to be properly prudent.
With its new legislation, the EU parliament has done a good job in imposing consistency on the very mixed emergency procedures that were used with so many different results in the 2008-09 banking crisis. At that time, when under great pressure from frantic voters, the national authorities surrendered to the politicians’ fears and allowed all sorts of favourable bailouts that gave much too favourable terms to the miserable bank managements.
The EU plan is for each member country to create its own resolution funds and build them up for eight years, starting in January 2016, after which, the funds will be gradually pooled among the participating member states until they are all shared by 2024 when the single EU resolution fund should be worth about €55 billion (Dh279 billion). One of the criticisms of the EU plan is that this fund is too small since European banks needed nearly €600 billion in recapitalisations and bailouts in the financial crisis of 2008-09, but if another really big crisis hits, then the mechanism that this legislation will create will be able to handle any emergency funds that will be found at that time.
