EU officials agree plan for failing banks

Common resolution fund of €55bn to be built up from bank contributions over 10 years

European commissioner in charge of financial regulation, Michel Barnier. Photo: Reuters

European commissioner in charge of financial regulation, Michel Barnier. Photo: Reuters

Thu, Dec 19, 2013, 08:36

European Union finance officials have agreed on a system for winding down failed banks, an important step toward introducing a banking union.

“This will break the vicious circle uniting banks and their sovereigns,” Michel Barnier, the EU commissioner who oversees financial services, said at a news conference early this morning.

The system, the Single Resolution Mechanism, is to go into effect in 2015. The details must be completed early next year in negotiations with the European Parliament, which faces elections in May, if the deadline is to be met.

The agreement, the result of nearly 18 months of negotiations, will create a resolution authority with a common fund for the 17 nations of the euro zone, although all 28 European Union members are welcome to join.

Officials hope the resolution authority, along with the creation of a banking regulator under the umbrella of the European Central Bank, will help restore confidence in a financial system that has suffered through a global financial crisis and a sovereign debt crisis in the last five years.

Before the final deal was adopted late last night, Vitor Constancio, the European Central Bank’s vice chairman, told European finance ministers that, if a more streamlined set of procedures were not adopted, “We fear that markets will find the process too complex, and it will not be totally credible that it can work in certain situations with the speed that is required.”

When banks begin to falter, the ECB will be responsible for identifying them and notifying a resolution board. The board in turn will notify the European Commission, the European executive, of the need for intervention to wind down or sell off the bank. If the commission rejects such a recommendation, national finance ministers will have the last say. Germany and others insisted on that structure as a means of guarding their interests in a political dispute, but it means that more than 100 people could be involved in some resolution decisions.

Chancellor Angela Merkel’s government, worried about the possibility that German taxpayers could be on the hook for bailing out banks in other countries, also contended that the legal basis of the resolution authority, which is being created under EU law, should be separate from that of the fund, which is being created by a treaty between euro zone members.

The common resolution fund of €55 billion will be built up over 10 years, with individual member states contributing money raised by bank levies. If it is not able to meet its obligations during that time, it will in theory be able to borrow money.

Mr Barnier, who had championed a more streamlined and robust system, acknowledged that the plan had shortcomings but said it was “a positive compromise,” considering that the views of all 28 member states had to be considered. “We needed an institution, legally, that could push the button,” he said.

Rimantas Sadzius, the Lithuanian finance minister who served as chairman of the meeting, said it was “very important to take the first step, because then you can check it against reality.”

New York Times