Euro ministers agree backstop measures for failing banks

Deal, agreed in early hours, is part of overall European Union efforts to build a banking union

 EU Economic and Monetary Affairs Commissioner Olli Rehn (left) and Minister for  Finance  Michael Noonan at the start of a Eurogroup Finance Ministers meeting at the European Council headquarters in Brussels. Photograph: Julien Warnand/EPA

EU Economic and Monetary Affairs Commissioner Olli Rehn (left) and Minister for Finance Michael Noonan at the start of a Eurogroup Finance Ministers meeting at the European Council headquarters in Brussels. Photograph: Julien Warnand/EPA

Wed, Dec 18, 2013, 11:07

Euro zone finance ministers last night agreed on a “backstop” to deal with problem banks should a bank need more capital while Europe’s €55 billion fund is being built up.

In a deal struck in the early hours of this morning after seven hours of talks, finance ministers from the 17 euro zone member states, agreed that “bridge financing” would be available as “a last resort” and in full compliance with State aid rules.

Crucially, the agreement allows for the euro zone rescue fund, the ESM, to be used. Ireland is seeking direct bank recapitalisation from the fund for AIB and Bank of Ireland. Alternatively, money will be sourced from national sources, backed by bank levies, according to a document agreed last night.

Last night’s agreement on the “backstop” - which was described by EU economics commissioner Olli Rehn as a “breakthrough” - has increased the sense that a deal on the wider single resolution fund will be agreed this week.

Speaking ahead of last night’s meeting, Minister for Finance Michael Nooonan stressed the importance of reaching an agreement on the backstop. “I think there has to be a backstop for credibility purposes. It might never be used, but it has to be there and it has to be significant. I think the intention is to agree everything before Christmas,” he said on his way into the emergency meeting.

Finance ministers of all 28 member states meet today in Brussels in a bid to reach agreement on the broader Single Resolution Mechanism - the European proposal for a single, centralised authority to wind-down problem banks - which was discussed in principle last week.

Germany has consistently raised objections to the European Commission’s proposal for a centralised fund to wind-down banks, wary of the “mutualisation” of bank liabilities. However, markets have warned that an integrated, cohesive banking union is essential for the health of the European banking system.

Last week a draft proposal was agreed by finance ministers on the single resolution authority, which set out a limited role for the European Commission in decision-making. It also agreed a framework for a €55 billion fund to resolve or restructure banks, which would initially be comprised of “national compartments” which would gradually be pooled into a single, mutualised fund, over a ten-year period.

However, criticism has emerged about the details of the proposed single resolution mechanism, which is widely perceived to have made significant concessions to Germany. Earlier this week, European Central Bank president Mario Draghi warned that the current rules under discussion to wind-down banks are “overly complex” while financing arrangements “may not be adequate.”

“I am concerned that decision-making may become overly complex, and financing arrangements may not be adequate” he told the European Parliament. . “We should not create a Single Resolution Mechanism that is single in name only”, he added, referring to the proposal to structure the fund as a network of ‘national’ funds which will be gradually pooled into a single fund. Minister for finance Michael Noonan also cautioned against creating a mechanism that was “overly-cumbersome.” “One would want to be able to [resolve a bank]over a weekend, as the maximum time span, so anything that’s too cumbersome with various layers to it, I don’t think would be effective,” he said last night.

Discussions on the resolution mechanism - the second main pillar of banking union - are likely to dominate a two-day meeting of EU leaders which begins tomorrow.