On December 12 the Financial Times reported EU reaches landmark deal on failed banks with a "common rule book for handling failed banks".

Gunnar Hökmark, the lead negotiator for the parliamentary side, said: "We now have a strong bail-in system which sends a clear message that bank shareholders and creditors will be the ones to bear the losses on rainy days, not taxpayers. At the same time we also established clear rules to deal with the most exceptional cases in which overall financial stability is in danger."

The next day, a friend commented the banking union agreement proved me wrong. I replied "wait for the details".

Laughable Details Now Pouring In

Let's start with a look at Eurozone Red Tape in the Financial Times just three short days later.

Fears are growing that the eurozone's proposed new banking regime will be too bureaucratic for the task of handling a sudden collapse of a cross-border institution.

The latest proposals could see up to 126 people being consulted on how to wind up a bank, even though agreement might need to be reached over the course of a weekend while financial markets are closed. Some senior officials are warning the proposals are too cumbersome.

A Financial Times analysis of the full banking union resolution process for a lender operating in three countries reveals the labyrinthine procedure that would still be required to wind up a bank. In a worst case scenario, where key officials disagree, this could involve nine panels and up to 143 votes being cast, from its supervisor raising a warning flag to the final wind-up decision.

Germany Backtracks on Banking Union

MarketWatch reports Germany appears to backtrack on EU banking deal

EU finance ministers have promised to agree on a so-called single-resolution mechanism--consisting of more centralized decision-making and financing for the shuttering or downsizing of failing banks--before the end of the year. But a letter sent by Wolfgang Schäuble to some of his counterparts sets clear limits on how far Europe's biggest economy is willing to go.

Mr. Schäuble's letter, dated Dec. 12 and seen by The Wall Street Journal, was described by German officials as reiterating Berlin's concerns expressed in recent talks.

At the heart of the disagreement is what to do when so-called bank resolution funds, financed by the banking sector, run out of money.

Under the provisional agreement reached last week, euro-zone countries would start building up national resolution funds by imposing levies on their banks. Those national funds would be gradually merged over 10 years into a single European fund containing around €55 billion.

Throughout the talks, Germany and other rich euro-zone countries such as Finland made clear that they didn't want their taxpayers to pay for problems that had developed in other countries' banks in the past. If the resolution funds prove too small to deal with a big bank's failure, taxpayers in the lender's home country should pick up the bill, they argued.

France and some Southern European countries, meanwhile, have been pushing to use the euro-zone government bailout fund, the European Stability Mechanism, as the common backstop.

Berlin believes the single resolution fund will be sufficient to deal with even large bank failures, the officials said.

"We think 55 billion [euros] would be an impressive sum," said one. In the unlikely event that it turns out not to be enough, the official said, the bank's home country could always ask for a loan from the ESM, just like Spain did last year.

That is the line Mr. Schäuble also took in his letter. "The SRF having reached its target level...will be the backstop to safeguard stability and protect taxpayers," he wrote. Mr. Schäuble hinted that Germany might agree to some deeper integration later, by calling for a "revision clause, based on implementation experience, on when and how to further improve and develop the future mechanism and backstop."

EU Ministers Set to Define Banking Union

Today, the Financial Times reports EU Ministers Set to Define Banking Union

Europe's banking union is at a crucial juncture. Three late-night meetings of finance ministers this week, culminating on Wednesday, is likely to define the eurozone's system for policing how its banks live and die, including a common fund to cover rescues. It marks the biggest surrender of sovereignty since the creation of the euro.

How will the costs of a bank failure be covered?

The first line of defence is imposing losses on the bank's shareholders and creditors. If that is insufficient then a bank-paid resolution fund will kick in. The fund aims to hit a €55bn target over 10 years; until then it is split into national funds that are gradually merged. In 2020, for instance, about €12.5bn of joint funds would be available, which amounts to perhaps a €3bn German contribution. A big bank collapse would dwarf the available resources; some €473bn of capital has been pumped into EU banks since 2008.

Will the banking union cover all eurozone banks?

It is a single system under law. But in practice national authorities will be the master of small banks (Germany would accept nothing less). The ECB will directly supervise around 130 of the bloc's 6,200 lenders, which covers 85 per cent of the bloc's bank assets. The resolution system will directly cover a couple of hundred more, as all cross-border institutions will be covered.

How does this relate to the ECB-led bank health check?

Banking union won't be ready for the results of the ECB health check in November 2014. Its resolution system will only be up and running from 2016. In any event Germany is determined that "legacy" costs are not shared. So the fallout from the review of banks will be mainly handled at national level, under existing rules.

What are the main weaknesses?

These are sweeping reforms agreed - in EU terms - at lightning speed. But scores of people are potentially voting on a resolution decision. The common resolution funds are not automatically available. There is no joint backstop if the resolution fund is overwhelmed. Deposit guarantees are as good as the ability of the national government to back them. Wolfgang Schäuble, Germany's finance minister, once called for a "timber-framed" system as a first step to full banking union. This might be it.

Serious Questions

Sweeping reforms? Lightening Speed? When only €12.5bn of joint funds would be available by 2020? When the first line of defence is imposing losses on the bank's shareholders and creditors?

Please be serious.

Banking Union Not Worth Supporting

Staunch eurozone supporter Wolfgang Munchau concluded on December 15, Banking Union Not Worth Supporting

Many advocates of banking union, including me, underestimated the economic costs of the banking union. ... Against the costs, one must obviously also consider the potential benefits. ... If done right, this could have been a hugely important project.

But, unless we see some important shifts in the balance of the argument, the political agreement reached last week simply did not cut it. I am not holding my breath here, since the political deal is done. But unless there are important additions to what we have been told about the deal, I would not think this banking union is worth supporting.

Banking Union Math

Munchau's reasons are important. He notes that the ECB will end up as "supervisor" of 128 banks with an aggregate balance sheet "somewhere between €26 trillion and €27 trillion."

How big is the proposed bailout fund? €55 billion, not available immediately, but built up over 10 years. It will take 10 years to build up a fund equivalent to a mere 0.2 per cent of the asset base.

Munchau asks "Would you call it insurance if the payout depended on whether the German parliament voted in favour?" That's a good question, but what about the other nine panels and up to 143 votes it would take for approval?

Munchau concludes "It is not a banking union, and should be rejected."

Indeed. There is no banking union, nor will there be one even if the various finance ministers agree to double or triple the alleged "impressive sum" of €55 billion built up over 10 years.

Expect Disorderly Breakup

Lost is the debate about "impressive sums", is the simple fact there should not be a banking union in the first place. In practical terms, there still isn't, but no one wants to admit that.

And given that there isn't a genuine union (which is the only way to realistically hold this mess together a bit longer), the eurozone ministers ought to focus on a meaningful task: how best to break up the eurozone with minimal disruption.

Unfortunately, they won't. Thus, the resultant eurozone breakup will prove to be very disruptive. The only other possibilities (and I have mentioned them before) are 1. slow growth and extremely high unemployment in the peripheral countries for another decade 2. Germany and the Northern countries pony up hundreds of billions of euros in more support (debt forgiveness, not loans).

Pick your poison, but a breakup is the most likely result.