Uh, Oh. More Banking Regulation Comes to the EU

The European Union will add a new union to its structure, a “banking union” that is designed to “fix” the EU’s still troubled financial sector and broken banks. Will a coalition of banks and more regulation really make it all better? Read More

These wheels were put into motion two years ago after the failure of savings banks in Spain. The fear that rippled through the European Union at that time lead leaders to develop a procedure to break the link between poor performing banks and government bailouts while improving the oversight of large lenders.

The new rules will apply to all lenders operating in the 28-country EU, including subsidiaries of U.S. and other foreign banks.

It took two years of harsh negotiations that pitted the flourishing northern countries like Finland and Germany, against France and struggling Southern countries like Greece over just how much liability they should share for the failure of banks. Now it will be easier to impose losses on failing bank’s investors that will force governments to build up funds to protect deposits. The governments will gather the safety net by collecting levies from banks.

“We have turned the idea of a banking union into reality in less than two years,” said Michel Barnier, the EU’s internal-market commissioner. “The banking union completes the economic and monetary union, and ensures taxpayers will no longer foot the bill when banks face difficulties.”

Despite this great achievement, there remain many critics that complain that the new system leaves too much responsibility in each nation and that it will take too long to build up funds to protect against a crisis.

One of the laws that passed, The Bank Recovery and Resolution Directive, sets out rules for imposing losses on a failing bank’s shareholder and creditors, which will come into force in 2016. Also, a hierarchy was established to oversee which investors will be hit first and places limits on how much governments can spend to bail out banks.

The goal is that the predictable rules will prevent a market panic similar to the one that followed previous bank failure.

Experts expressed their hesitations that these laws will truly change the framework and that stability is based on the attitudes of banks in charge.

“The changes must be matched with real willingness by the financial sector to learn from the crisis,” said Monique Goyens, director general of the European Consumer Organisation. “Any attempt to clean up the financial sector’s malpractices will fail when the roulette with people’s money is allowed to continue.”