A Brussels murder mystery: Who knifed the banking union (again)?

A Brussels murder mystery: Who knifed the banking union (again)?
Опубликовано: Tuesday, 14 March 2023 06:34

The collapse of Silicon Valley Bank means questions are again being asked about why the EU can’t tighten its rules.

It’s the latest Brussels bubble whodunnit: Which country wielded the knife against the EU’s half-formed banking union this time?

As the collapse of U.S. lender Silicon Valley Bank again shines a light on the fragility of the world’s financial system, speculation grows within the EU’s corridors of power about who or what prompted the European Commission — at the last minute — to pull a controversial piece of banking legislation.

The plan for tighter rules on bank bailouts mysteriously dropped off the Commission’s agenda for last week, and it’s now expected to be M.I.A. for at least a month. Or even longer.

And there couldn’t have been a worse time for Europe’s banking union plan to suffer another flesh wound.

The decision to delay came ahead of the collapse of SVB, which had $209 billion in assets — requiring a U.S. government backstop for all depositors and exposing gaps in the framework for handling failing banks.

While SVB’s business model was relatively unusual, and heavily dependent on the tech industry, the bank was a mid-sized lender in the bigger U.S. market.

The on-hold EU rules are aimed at stopping a middle layer of banks from receiving public money in a crisis, and the U.S. decision to rescue all SVB depositors will raise questions about whether Europe’s framework could do the same to stop a bank run.

There are plenty of countries with a motive to delay the latest EU proposal. Plenty of other protagonists too. At POLITICO we’ve donned our fedora to investigate the most likely list of suspects, as officials and diplomats point fingers at each other behind the scenes.

While individual countries will often happily claim credit for blocking a reviled piece of EU law, anyone holding up the banking union — one of the EU’s hallmark projects to strengthen banks and build a single market — would be publicly reneging on previous political commitments. And that could now be particularly ill-timed after the events of the weekend.

So, the assailants have been working in the shadows — which in Brussels means writing strongly-worded letters and meeting commissioners in private.

But curtain-twitchers along Rue de la Loi and the Schuman roundabout suggest there are five possible culprits:

Suspect No. 1: Germany

Germany has previous. Berlin last year killed off an EU-wide deposit insurance scheme due to concerns over joint debt and bad flashbacks to the eurozone crisis. That led to the current mandate for Brussels to close loopholes in the bank crisis management and deposit insurance (CMDI) review.

This time round, Germany is likely to want an exemption for its politically sensitive protection schemes for cooperative and savings banks, making it suspect number one.

“It seems clear it is to do with Germany, I don’t know any other [member country] who made blocking concerns at this phase,” said one EU diplomat, who spoke on condition of anonymity because of the sensitivity of the discussion.

But Berlin isn’t taking the blame. “We’re not requesting a delay or postponement of the CMDI review. The review is an important step in the work of the Banking Union,” said a German diplomat.

Suspect No. 2: France

That brings us to our second suspect. At an EU level, Paris generally fights tooth and nail to protect the interests of its big banks. While the delayed set of reforms are predominantly aimed at smaller lenders, France doesn’t want any more costs imposed on its larger institutions.

But the French, too, say they’re not responsible for CMDI’s disappearance. “We fully support the principle of an ambitious reform of the crisis-management framework, but we realize that these are positions that are not yet consensual in the Council, and the Commission no doubt judged that it needed a little more time to see what level of ambition to include in the project,” said a French economy ministry official.

Suspect No. 3: Unintentional driveby

And so, there’s a third theory.

Germany and France signed up to a single-page statement with the Netherlands and Finland that was sent to the Commission back in December, raising concerns over the risks involved in expanding the use of national deposit guarantee schemes.

Some Brussels insiders think that gave the Commission pause because the EU executive would immediately face a blocking minority. But a second EU diplomat said it was “not fair” to blame the letter because it reiterated longstanding issues and was not intended to prompt a delay.

The plot thickens. But one thing is clear from our expert sleuthing: the proposal is being held up politically within the Commission. As well as the pressure from EU countries, that could be because of waning appetite at the top of Brussels officialdom.

And that brings us to our fourth suspect.

Suspect No. 4: Ursula von der Leyen

Yes, the European Commission president herself.

With only a little over a year left in this Commission’s five-year term, does von der Leyen really want to bring forward a political contentious reform on the esoteric issue of mid-sized bank bailouts?

“I just get the impression anything controversial is being kicked into touch,” said a third EU diplomat.

Suspect No. 5: Some guy with the documents in his drawer

But the most plausible — and by far the more boring option: Brussels bureaucracy. The Commission knows it will face tough opposition on the content, so its army of officials are making sure its plans are as watertight as possible, and before EU capitals attack them in public.

There may be some frantic rewriting going on. The Commission could also be playing a clever double bluff, by getting EU capitals to clamor for the reforms to come out.

“The Commission remains committed to bringing forward a proposal on CMDI,” said an EU official.

The longer it takes though, the more doubt there is over whether the thing’s still alive at all.

And in case you are interested in the forensics ...

The Commission’s plans are expected to bring more mid-sized banks into the resolution framework, a major post-financial crisis reform that means shareholders and creditors rather than taxpayers swallow losses if a bank fails.

Under the missing plans, countries would be able to use their national deposit guarantee schemes — which protect deposits to the tune of €100,000 — upfront to cover losses, rather than only after a collapse, and change their debt ranking.

A middle tier of banks, which until now haven’t fit neatly into the resolution regime and have continued to receive public money in a crisis, would then be able to meet conditions to access an EU rainy-day fund that would pay for their exit from the market.

All of that is hugely controversial and risks pitting EU goals of closer integration against national fears of being on the hook for losses in another country. So, our suspects may not have needed much provocation.

Now, the collapse of SVB and its potential implications also throws a wildcard into the mix.

Giorgio Leali contributed reporting.

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