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| European Parliament Approves Laws on Banking Overhaul | European Parliament Approves Laws on Banking Overhaul |
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| BRUSSELS — After countless late-night meetings and political skirmishes, the European Union on Tuesday put in place the final pieces of a landmark plan for managing a banking system whose troubles have done so much to dent the bloc’s economic prospects. | |
| The creation of structures that officials have grandly dubbed a “banking union” is one of the biggest steps toward European financial integration since the introduction of the euro more than a decade ago. The negotiations pitted prosperous northern countries like Germany and Finland against France and struggling southern countries like Greece over the issue of how much liability to share for bank failures. | The creation of structures that officials have grandly dubbed a “banking union” is one of the biggest steps toward European financial integration since the introduction of the euro more than a decade ago. The negotiations pitted prosperous northern countries like Germany and Finland against France and struggling southern countries like Greece over the issue of how much liability to share for bank failures. |
| “The E.U. has lived up to its commitments,” said Michel Barnier, the bloc’s commissioner for financial affairs, who originally proposed the three chunks of legislation passed on Tuesday. | “The E.U. has lived up to its commitments,” said Michel Barnier, the bloc’s commissioner for financial affairs, who originally proposed the three chunks of legislation passed on Tuesday. |
| But even as the union establishes new structures for assessing the health of banks and for rescuing and shuttering those that cannot be salvaged — even introducing an element of burden sharing — critics say the plan still is checkered with uncertainties and weaknesses. | |
| Lawmakers meeting at the European Parliament in Strasbourg, France, for their last plenary session before May elections, overwhelmingly approved the package, which is subject to final approval by the bloc’s Council of Ministers. That is seen as a formality because representatives from the governments have already given their consent to harmonizing the patchwork of banking laws in Europe. | Lawmakers meeting at the European Parliament in Strasbourg, France, for their last plenary session before May elections, overwhelmingly approved the package, which is subject to final approval by the bloc’s Council of Ministers. That is seen as a formality because representatives from the governments have already given their consent to harmonizing the patchwork of banking laws in Europe. |
| One of the laws, a bank recovery and resolution directive, gives the 28 states in the union a common rule book for handling failing banks. It would also oblige creditors like bondholders to take losses of up to 8 percent of a bank’s total liabilities before state funds were used. | |
| The other main law, a regulation for a single-resolution mechanism, establishes a board to ensure that the owners and creditors of major lenders in the euro zone pay first in cases of failure. That regulation would also establish a common fund of 55 billion euros, or $76 billion, to be built up over eight years, financed by all euro zone banks to help cover the costs of closing banks. | |
| Lawmakers also approved without a formal vote a law confirming a guarantee on deposits up to €100,000. It requires countries for the first time to partly fund the system in advance and it gives depositors access to their money more quickly. | Lawmakers also approved without a formal vote a law confirming a guarantee on deposits up to €100,000. It requires countries for the first time to partly fund the system in advance and it gives depositors access to their money more quickly. |
| For now, the biggest question is how thoroughly the European Central Bank will carry out the job of raking through the accounts of the biggest euro-area banks for hidden problems. Lawmakers at the Parliament already gave that authority to the central bank in September, putting about 130 of the euro zone’s largest banks under its direct scrutiny. | For now, the biggest question is how thoroughly the European Central Bank will carry out the job of raking through the accounts of the biggest euro-area banks for hidden problems. Lawmakers at the Parliament already gave that authority to the central bank in September, putting about 130 of the euro zone’s largest banks under its direct scrutiny. |
| The idea here is that the central bank would do a better job than national supervisors of nipping financial problems in the bud so that governments would not need to resort to bank bailouts that destabilize the euro and penalize taxpayers. Yet experts foresee some possible teething problems. | The idea here is that the central bank would do a better job than national supervisors of nipping financial problems in the bud so that governments would not need to resort to bank bailouts that destabilize the euro and penalize taxpayers. Yet experts foresee some possible teething problems. |
| “The central thing for the success of banking union is that the E.C.B. makes a strong impression as the single supervisor during the first year and a half of operations,” said Guntram B. Wolff, the director of Bruegel, a research organization in Brussels. “The E.C.B. could inevitably make mistakes by, for example, misreading a number because it has very little experience with a huge task.” | “The central thing for the success of banking union is that the E.C.B. makes a strong impression as the single supervisor during the first year and a half of operations,” said Guntram B. Wolff, the director of Bruegel, a research organization in Brussels. “The E.C.B. could inevitably make mistakes by, for example, misreading a number because it has very little experience with a huge task.” |
| Yet the biggest test will likely be a political one, Mr. Wolff said. “The E.C.B. must be as tough with a bank in Germany as with a bank in Greece,” he said. “Ultimately, does the E.C.B. have the political clout?” | Yet the biggest test will likely be a political one, Mr. Wolff said. “The E.C.B. must be as tough with a bank in Germany as with a bank in Greece,” he said. “Ultimately, does the E.C.B. have the political clout?” |
| The votes came more than five years after the problems in the American housing market, and the discovery of a big hole in Greece’s finances, set loose a wider banking crisis that led countries including Britain and Spain to use public money to bail out their troubled lenders. | |
| In one case, in Cyprus, the authorities were initially prepared to trim depositors’ savings to bail out banks before an outcry by Cypriots and European legislators forced a change of tactics. | In one case, in Cyprus, the authorities were initially prepared to trim depositors’ savings to bail out banks before an outcry by Cypriots and European legislators forced a change of tactics. |
| “We are finally doing it now,” Hannes Swoboda, the president of the Socialists and Democrats group in the European Parliament, said at a news conference. “Late, but we are doing it.” | “We are finally doing it now,” Hannes Swoboda, the president of the Socialists and Democrats group in the European Parliament, said at a news conference. “Late, but we are doing it.” |
| Even so, it is unclear how much the new laws will keep taxpayers out of the firing line the next time there is a full-blown bank crisis. | Even so, it is unclear how much the new laws will keep taxpayers out of the firing line the next time there is a full-blown bank crisis. |
| Some critics contend the new system depends too heavily on allowing losses to fall on creditors who may be connected to institutions that underpin the stability of other parts of the banking system. Their concern is that, in times of crisis, the authorities could shy away from applying the rules penalizing or “bailing in” creditors, out of fear of creating a domino effect, again opening the path to relying on another solution that involves public money. | |
| The authorities “will get jammed when there is a crisis involving very large and very interconnected banks,” said Greg Ford, a spokesman for Finance Watch, a research and advocacy group based in Brussels that works on financial regulation. | The authorities “will get jammed when there is a crisis involving very large and very interconnected banks,” said Greg Ford, a spokesman for Finance Watch, a research and advocacy group based in Brussels that works on financial regulation. |
| That, he said, made an overhaul of the structure of the largest banks in the European Union another priority. “Separating large banks’ trading activities from deposit taking would lead to smaller, simpler banks and so reduce the domino effect,” he said. | That, he said, made an overhaul of the structure of the largest banks in the European Union another priority. “Separating large banks’ trading activities from deposit taking would lead to smaller, simpler banks and so reduce the domino effect,” he said. |
| The European Union also still needs to devise ways to “stop incentivizing banks to load up on sovereign debt” as the only real way to break the so-called doom loop, or link between the solvency of governments and banks, he said. | The European Union also still needs to devise ways to “stop incentivizing banks to load up on sovereign debt” as the only real way to break the so-called doom loop, or link between the solvency of governments and banks, he said. |
| The banking industry broadly welcomed the laws. “Having the same rules for banks in all E.U. member states creates much-needed clarity and makes processes more effective, said Guido Ravoet, the chief executive of the European Banking Federation, an industry body in Brussels. | |
| It remains unclear whether the legislation would ever enable European banks to be wound down over the course of a weekend — a stated aim of European officials — as “the decision-making process is still rather complicated,” according to Reinhard Cluse, chief European economist at UBS in London. Authorities might find that they “need to go back to the drawing board” on that part of the process, he said. | |
| For Mr. Wolff of Bruegel, the sizable amounts of money that banks will have to pay toward their own rescue under the bank recovery and resolution directive, combined with the steps under separate legislation toward establishing a shared pot of €55 billion contributed by banks, offer far greater assurances of stability than during the recent past. | |
| Even so, he warned that the lack of an ultimate financial backstop that might be needed for a large-scale bank failure remained another key weakness of the legislation. | Even so, he warned that the lack of an ultimate financial backstop that might be needed for a large-scale bank failure remained another key weakness of the legislation. |
| “In a systemic crisis the F.D.I.C. has a credit line with the U.S. Treasury, and that’s something we still don’t have,” said Mr. Wolff, citing a backstop federal insurance system in America. “The bail-in is supposed to be automatic, but there still could be exceptions and recourse to using public money sooner than you think.” | “In a systemic crisis the F.D.I.C. has a credit line with the U.S. Treasury, and that’s something we still don’t have,” said Mr. Wolff, citing a backstop federal insurance system in America. “The bail-in is supposed to be automatic, but there still could be exceptions and recourse to using public money sooner than you think.” |