Ministers discuss bank ‘backstops’ in Luxembourg

Concern where responsibility will lie for filling capital holes revealed by stress tests

Euro group chairman Jeroen Dijsselbloem listens to Luxembourg’s Finance Minister Luc Frieden during an euro zone finance ministers meeting in Luxembourg yesterday. Photograph: Francois Lenoir/Reuters.

Euro group chairman Jeroen Dijsselbloem listens to Luxembourg’s Finance Minister Luc Frieden during an euro zone finance ministers meeting in Luxembourg yesterday. Photograph: Francois Lenoir/Reuters.

Tue, Oct 15, 2013, 01:46

Governments are likely to meet any capital shortfalls uncovered by next year’s banking stress tests, though only after private options and bail-in rules are implemented, euro group chairman Jeroen Dijsselbloem said yesterday following a euro group meeting in Luxembourg.

Finance ministers and government officials of the 17 euro states discussed the issue of “backstops” yesterday amid concern about where responsibility will lie for filling any capital holes revealed by next year’s European stress tests.

With the banking resolution and recovery directive (BRRD), which sets out a clear hierarchy of creditors to be bailed-in in the event of a bank wind-down, not scheduled to come into effect until 2015 at the earliest, ministers discussed possible backstop mechanisms.

“There was broad support for maintaining the agreed sequence of backstop arrangements,” Mr Dijsselbloem said following the meeting.

Public money
That would involve private sector solutions in the first case before public money would be engaged, he said, adding that “if the state couldn’t afford to contribute then the ESM would come into play” .

Discussions are expected to intensify at today’s meeting which will be attended by German finance minister Wolfgang Schauble, who missed yesterday’s euro group meeting because of German coalition talks. Germany is staunchly resistant to a single-resolution fund to deal with troubled banks, instead favouring a network of national resolution funds. The Germany position is supported by Finland and the Netherlands.

“For now we should rely on national backstops, meaning that if needed national governments would step in,” Finland’s finance minister Jutta Urpilainen said yesterday.

British concerns over the single-supervisory mechanism, the first so-called “pillar” of banking union which provides the legal basis for the ECB taking over supervisory authority of banks, subsided yesterday, with UK sources indicating that Britain would give the go-ahead to the deal today. Britain is understood to have received assurances that voting rights would be preserved.

Meanwhile, Mr Dijsselbloem played down claims by ECB executive board member Jorg Asmussen earlier in the day that Greece would face a fiscal gap of €5-6 billion next year.