Banking Union Will Make Bank Resolution More Objective, Says Fitch

The European Commission’s (EC) legislative proposal for a single supervisory mechanism (SSM) using the European Central Bank (ECB) means that euro area banks will be supervised more consistently, according to Fitch Ratings. While political and execution risks remain, the short timetable forces discrepancies to be dealt with quickly. When considered as part of the wider crisis resolution and EU banking reform agenda, Fitch sees the SSM as positive for banking sector credibility and stability in the euro area.

The SSM proposals are a prerequisite for the ESM being able to recapitalise banks directly. As such they are a positive near-term step towards breaking the destructive bank/sovereign nexus in the euro area and recapitalising failing, but fundamentally viable, Spanish banks in particular.

It is impossible to ignore the huge influence that such support has on bank default risk, reducing it by a factor of around eight over a five year period according to Fitch’s data. In this regard, the supplementary communication in which the EC outlined its roadmap for banking union is, for the longer-term, just as important as the SSM legislative proposal.

The SSM proposals envisage the ECB being granted bank authorisation and early intervention powers as part of its supervisory remit. However, these fall short of full resolution powers and national authorities will still have a role. Where the divide falls is hazy. Nonetheless, the roadmap makes clear that a critical next step towards full banking union should involve a single resolution authority. Overall, these aspects mean that intervention and resolution decisions are being taken out of national hands, thereby weakening the political considerations that can influence (or cloud) support decisions.

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