An agreement on the Single Resolution Mechanism (SRM) reached in Brussels on a fund to save failed banks – meaning taxpayers would not have to cough up the funds themselves – has been met with disappointment by local commentators.

All-night talks last week ended a stand-off between the European Parliament and eurozone countries over the new scheme, completing the second leg of banking union that is due to start this year when the European Central Bank takes over as watchdog.

The details of the compromise, which must still get rubber-stamped by the whole European Parliament and EU finance ministers, are outlined in a draft agreement. Under the deal reached, a €55 billion fund made up by levies on banks will be built up over eight years, rather than 10 as originally envisaged. Forty per cent of the fund will be shared among countries from the start and 70 per cent after three years.

It also envisages giving the European Central Bank the primary role in triggering the closure of a bank, limiting the scope for country ministers to challenge such a move, something that Bank of Valletta chairman John Cassar White welcomed.

“The stricter vigilance by the ECB on eurozone banks remains the more positive element of the latest agreement on the European Banking Union.

“However, what happens should a eurozone bank find itself in a solvency crisis is still not satisfactory. Once again, EU politicians prefer to ‘kick the can’, hoping that problems will resolve themselves. The first real test of this agreement will come when the Asset Quality Review results are announced.

“We will have to see how weak banks will be dealt with. Probably, national governments will have to cough up the funds to strengthen these banks,” he told The Sunday Times of Malta.

John Consiglio, a university lecturer on banking regulation, was also disappointed:

“There is no doubting that the Banking Union measures and new structures (mainly EBA, ESMA and EIOPA) are all conceived and set up in a way that tries to provide for any possible recurrence of practically all the elements that have led to the recent financial meltdowns.

“As such I am confident that over the next few years the regulatory environment will be such as to keep both the institutions, and the economic environment within which they operate, attentive and on their guard against things going wrong in some similar way to what we’ve been seeing since 2008.

“But the problem, as always, lies within terms of what is often referred to as ‘regulatory capture’, namely situations (which usually evolve over a span of time) where market operators become so attuned to what the regulatory structures are expected to want, that they create new by-passing realities,” Mr Consiglio said.

‘Let’s hope it’s never tested’

“Regulators and the regulated essentially operate in terms of different inherent market philosophies, and realities, and seen essentials. Regulators should always be re-regulating continuously, but they also always have valid reasons for not exasperating that reality in the short-term. And the long term is only a series of short terms at which point reality would have changed drastically.

“Inevitably, at both EU and national levels, we will have at some point in time to return to the drawing board.”

Economist Lino Spiteri was similarly unconvinced that the draft agreement would reach its aims:

“Like all compromises, the union will not satisfy all the identified requirements.

“Let’s hope it’s never tested... but if it is, it may have a short life,” he said.

The European Banking Federation welcomed the agreement:

“The historic breakthrough provides improved clarity and efficiency for the decisions to be made under the new mechanism that determines whether eurozone banks need to be placed into resolution.

“The Council and the Parliament have seized the final opportunity to overcome their differences. This is good news for all of us. For banks in Europe it is important to have an efficient decision-making process for resolving a bank.

“Clarity is essential in order to minimise the impact of a bank failure and avoid the need for taxpayer support,” EBF chief executive Guido Ravoet said.

However, the EBF expressed reservations about the Single Resolution Fund, saying the build-up period of eight years for the fund differs from the 10 years allowed in the Bank Recovery and Resolution Directive (BRRD).

“This places a heavier burden on banks inside the Single Supervisory Mechanism to contribute and may result in competitive distortions in the single market.

“The EBF recalls that the requirement for banks to finance the fund with €55 billion comes on top other obligations that the banking sector must fulfil under recent regulatory reform measures.”

One of the few entities that welcomed the agreement was the European Central Bank, which said the negotiations between the European Parliament and the European Council produced an SRM that was more efficient and credible.

“It is a very good agreement,” ECB president Mario Draghi said in Brussels.

“The ECB has always stressed that an effective SRM has to be adequately funded. It therefore welcomes that the Single Resolution Fund will have greater firepower in its early years and thus be more effective in breaking the link between banks and sovereigns and protecting taxpayers’ money.

“There will also be a clear reference to establishing an enhanced borrowing capacity for the fund,” the ECB said in a clear effort to put a brave face on it.

“The smooth functioning of the SRM requires a swift and efficient decision-making process. The ECB welcomes the fact that the proposal now caters for a swifter procedure, ensuring timely resolution decisions,” the ECB said.

“This is great progress for a better banking union. Two pillars are now in place,” Mr Draghi said.