As the European Union (EU) continues to move through the bureaucratic process of implementing a banking union meant to set up an orderly winding down of failing financial institutions that minimizes costs to taxpayers, European Central Bank (ECB) Mario Draghi warned that it wasn't going to be an end-all solution for a complete stabilization in Europe.
"The banking union however is not a panacea for eliminating financial market fragmentation and fully stabilizing Europe," Draghi told the European Parliament in a speech delivered on Thursday.
The ECB chief did describe the agreement as being of "paramount importance" but reminded members of the European Parliament that further steps must be taken such as the "continued fiscal consolidation and implementation of structural reforms, but also progress on the 'unions'".
Draghi considers that the banking union is a "necessary, but not sufficient condition to break the bank-sovereign nexus and restore sustainable economic growth".
After an initial directive was approved by EU finance ministers on Tuesday night, European Internal Markets and Services Commissioner Michel Barnier announced on Thursday that the European Parliament and EU member states had also reached an agreement on the framework for bank recovery and resolution.
"Ensuring that failing banks can be wound down in a predictable and efficient way with minimum recourse to public money is fundamental to restoring confidence in Europe's financial sector," Barnier said.
The new rules will include the bail-in of shareholders and creditors with deposits under €100.000 exempt from loss. This bail-in tool is to be applied in 2016.
If additional resources are needed, they will be taken from the national, prefunded resolution fund that each member state will have to establish. Banks will be required to pay into this national rescue fund until it reaches 1% of covered deposits within 10 years. "All banks will have to pay in to these funds, but contributions will be higher for banks which take more risks," Barnier indicated.
In any case, the agreement reached is not the final step in the completion of the banking union. EU members still need to agree on new rules for deposit guarantee schemes and single resolution mechanism must be finalized. Barnier said he expected final agreement on these last two issues "in the next few days".
EU finance ministers are hoping to have a final agreement in place by their extraordinary meeting on December 18th so it could be presented to the European summit on the following two days. In any case, officials have said repeatedly that they wish to reach an agreement by year-end in order to pave the way for European Parliamentary approval before new elections next May.