Proposals to break deadlock on bank fund put forward at Ecofin

Deadlock over a proposed euro-area bank-failure agency could be broken by allowing an accompanying fund to borrow on financial markets with state guarantees, Dutch Finance Minister Jeroen Dijsselbloem said.

European Union finance chiefs meeting in Brussels today debated how to bolster the credibility of the Single Resolution Mechanism for euro-zone lenders. Some ministers raised concerns about the size of the industry-financed fund to cover the cost of saving or shuttering lenders, €55 billion, and the decade foreseen for it to reach full strength. Allowing the fund to borrow from markets would ensure that it's "at all times up to target level" and available as needed, Dijsselbloem said during today's meeting. "But we need to have, for the first 10 years in which we have national compartments, national guarantees on that lending facility."

The SRM bill is the next phase of the EU's banking union project, which begins when the European Central Bank becomes the euro area's single supervisor in November. Ministers are racing to reach agreement on the legislation with the European Parliament in time to get the law on the books before the assembly adjourns for May elections. Finance ministers and the parliament set forth their competing versions of the bill late last year. Talks on a compromise text have so far proven fruitless.

In their plan, the ministers set out a system of national compartments for bank contributions to the single fund. Such barriers would be phased out, resulting in a common pool when the fund is at full strength. Germany has led a push to slow down the pooling of resources that make cross-border money available in an emergency. The ECB has countered that a unified defense is essential to save off future financial crises.

At today’s meeting, ministers warned that markets may continue to flare unless they receive a strong signal that the system is strong enough to withstand emergencies. They remained divided on the issue of a public backstop to stand behind the resolution fund.

"The financial system, as the political system, depends on credibility," said Portuguese Finance Minister Maria Luis Albuquerque. "Having a credible backstop to support the whole resolution fund is of critical importance. If we set up an elaborate mechanism that doesn't have a credible backstop, then all of the principles that we have been highlighting as very relevant may become irrelevant."

Options explored today included speeding up the pooling of the SRM fund's resources, a proposal supported by the ECB. Germany's Wolfgang Schaeuble reiterated his insistence that this would require forcing banks to accelerate payments into the fund, as pooling and pay-in must move together. The EU embarked on its banking union project to break the link between troubled banks and struggling sovereign borrowers that fueled the euro area's debt crisis. The ECB's oversight powers will combine with new rules for when regulators can force losses on bank creditors in a bid to prevent bailout costs from overwhelming nations that use the common currency.

Irish Finance Minister Michael Noonan made the case for a backstop to underpin the bank-failure fund given its limited capacity, saying markets need a sign that a plan's in place. "When you think of European banks having multi-trillions of assets on their balance sheets, the fund itself is quite small," Noonan said. "Maybe if we could bring forward the date of consideration of the backstop, or if we had an agreement that a backstop would be in place by a certain date, that might help the credibility of the system."

Schaeuble countered that the backstop is a question for the future. He said ministers agreed in December to postpone consideration of the issue and it would be counterproductive to reopen it now. “We agreed, and I would like to remind us, it makes no sense to start now discussions on a possible common backstop,” Schaeuble told his colleagues.

Bloomberg