By Luke Baker and Carmel Crimmins
BRUSSELS/DUBLIN (Reuters) - In the beginning, the European Union came up with two words: Banking Union. It sounded simple, solid, united, dependable.
But in the 18 months since the idea was put on paper, the phrase has come to mask a vastly complicated and not yet very united system that may fall short of resolving the problems afflicting Europe's banks over the past five years.
From a Single Supervisory Mechanism to a Single Resolution Mechanism, incorporating a split-level authority and a Single Resolution Fund, Europe's banking union has become a multi-headed hydra offering little clarity on when or how quickly a bank's problems can be sorted out.
Aside from the plethora of acronyms - SSM, SRM, SRF, BRRD - that litter the snowstorm of documents produced to discuss the concept, it is still not absolutely clear which banks will be overseen by which authority and who has the final (the final, final) say in deciding if a bank has to be wound up.
As one exasperated U.S. diplomat put it after the last round of late-night negotiations over the scheme: "You try and explain that to the U.S. Treasury."
DEVIL IN THE DETAIL
When it was first sketched out at the height of the euro crisis, banking union was supposed to have three solid planks: a single supervisor for the region's 8,000 banks; a single resolution authority to restructure or close failing banks; and a unified scheme for guaranteeing bank deposits.
Drawing on the expertise of the European Central Bank and the logic of the U.S. Federal Deposit Insurance Corporation, the aim was to overhaul the disparate network of regulation across the 28 EU member states - especially the 17 in the euro zone - and produce a cleaner, smoother system of oversight.
After years of economic turmoil caused in large part by problems in the banking system, the hope too was that a way could be found to act more quickly in forcing unstable banks to recapitalize or shut down those carrying excessive risk.
Once fully up and running, Europe's banking union may well be able to do those things better than before, which should provide reassurance to investors.
But there remain doubts as to how long it will be until the system can be said to be fully functioning.
Crucially, the original idea included a common fund to deal with problem banks and effectively pool risk.
Under the latest proposal, intended to broker agreement for an EU summit later this week, the cost of closing down a euro zone bank will initially be borne almost fully by its home country, with a common fund paid for by the banks to be built up gradually over 10 years.
In the meantime, next year's ECB health check of the bloc's biggest banks is expected to expose capital holes that if private investors are unable to fill may leave indebted governments on the hook, reinforcing the very "doom loop" between sovereigns and lenders that banking union was designed to break.
"It's going to take a while to build this up and there are lots of tensions coming down the track much sooner than that," said Alan Ahearne, an economist who advised the Irish government as it faced the collapse of its banking system.
"What they are building is a banking union and resolution for a steady state, but we are not at a steady state. Things aren't in equilibrium. We are still trying to get over these legacies from the past."
LONG LEAD TIME
When examined up close, each of the three planks of banking union has been either compromised or removed.
Rather than overseeing all 6,000 banks in the euro zone - let alone all 8,000 in the EU, the ECB's new supervisory role will actually see it monitor only 130 on a day-to-day basis.
And rather than being able to call for the recapitalizing or winding up of any of the banks, the resolution authority will have primary responsibility for only around 250, officials say. National resolution authorities will track the rest, with the pan-European body having a degree of input.
Even if the central resolution body does decide a bank needs to be shut down, it must jump through a series of hoops, getting agreement from national authorities, the European Commission and relevant board members first.
Already concerns are being raised about how quickly it could act if a decision on shutting a bank had to be taken over a weekend - a likely time frame in a financial emergency.
"The decision-making part is so horrendously complex that I think it will have to be changed," said Daniel Gros of the Center for European Policy Studies, a think tank in Brussels.
As for the third plank of banking union - the single deposit guarantee scheme - that has essentially been dropped.
Michel Barnier, the European commissioner in charge of banking union, told Reuters earlier this year that in his mind it was unworkable. Instead, a system would have to be found to coordinate deposit schemes in each member state, he said.
The long and the short of it is that Europe seems to be moving in the right direction, banking and finance experts say. But the process may take a decade to complete and between now and then dangerous holes could emerge in the system.
The ultimate aim of banking union was to sever the link between governments and bad banks and ensure that taxpayers were not left on the hook for bailing out rotten institutions.
That goal still stands, but it is going to be some time before policymakers can declare it met.
(Editing by Mike Peacock)