Europe’s Ungainly Banking Revolution

BRUSSELS – Late last year, eurozone finance ministers reached a compromise on the basic elements of the Single Resolution Mechanism (SRM) – that is, how to deal with banks in difficulty. It looks ugly, but it also appears likely to work.

The main ingredient of the compromise is to use, at least initially, separate national funds in case a bank needs to be saved, while also creating a common Single Resolution Fund (SRF) of up to €55 billion ($75 billion) over the next ten years, which is to be financed by contributions from the banks themselves. The entire SRM would be run by a collection of national supervisors and representatives from the European Central Bank and the European Commission.

The defects of this compromise are apparent. For starters, the SRM will not, at least at the beginning, be a “single” mechanism at all. National funds – and thus national authorities – will continue to be responsible for “their” banks’ problems, with the SRF’s contribution to any rescue operation rising only gradually. It will be at least a decade from now – roughly the year 2025 – before the SRM is really “single,” with the use of separate national funds ending.

That is, of course, a long transition period. But, because the ECB is in the process of conducting an asset-quality review of bank balance sheets, there is little danger that too many skeletons will remain in banks’ closets. Moreover, after five years (by 2020), the SRF could already have close to €30 billion ($40 billion) available, more than most national funds, thus providing an important backstop should any national fund be insufficient.