EU to stem the tide of banking crisis

Impact on affiliates of local banks
still unclear

The affiliates of local banks operating in Europe, similarly to their European peers, will soon have to abide by a new banking rule set by the European Union.

Finance ministers from across the EU agreed last week on a scheme to close failing banks before they could do too much damage to the wider economy, as in the cases of Ireland and Cyprus. This scheme, known as ‘the Single Resolution Mechanism’, is a first step toward the eventual development of a banking union.

The new scheme, which is scheduled to start by 2015, consists of creating a fund that will be fed by the banks themselves. Banks will have to pay into a fund that will grow to 55 billion Euros ($75 billion), over ten years.

“This is a very positive and well-planned step taken by the European Union to solve problems of the banking sector in the eurozone,” said Joe Sarrouh, Executive Advisor to the Chairman at Fransabank. However, the impact of such scheme on affiliates of local banks cannot be measured immediately, according to him. “We still have to wait for details about the financing mechanism and methods to be applied by banks, in order to evaluate if this scheme will impact our local affiliates in Europe positively or negatively,” he said.

“This scheme is complicated and politicized,” said Sarrouh. According to him, big players in the EU, like Germany, won’t easily accept to grant money to failing banks, especially if this failure is related to bad management.

The new fund to wind down bad banks will be working in tandem with the European Central Bank. All 17 eurozone countries, soon to be 18 with Latvia joining next month, will be bound to the scheme, while non-eurozone members have the option of joining.