Banks will be able to tap bailout fund, says head of stress tests

Euro zone banks in need of fresh capital will be able to tap Europe’s ESM bailout fund as a last resort, the head of the bloc’s new banking regulator has confirmed.

Danièle Nouy, the first head of Europe’s Single Supervisory Mechanism (SSM), has said her institution would not shy away from closing down banks that fail the latest round of bank stress tests.

But, in remarks sure to cause irritation in Berlin, the 63 year-old French banker has confirmed that the crisis-era fund will be open for business to ailing private banks.

Direct ESM recapitalisation of financial institutions has been an Irish political priority to recoup taxpayers’ money invested to prevent Irish banks collapsing. But Berlin has always been cool on the idea, insisting that any ESM lending to the private sector is a long way in the future. German officials insist the ESM was created primarily to support states unable to borrow elsewhere – not banks – and that limited lending to private institutions will only happen when the so-called banking union is functioning satisfactorily.

Ms Nouy told this morning's Der Spiegel that "as a last resort" the ESM "would be a possibility" for struggling banks.

“But we will not shy away from having banks wound up,” she added.

Assessing data

Ms Nuoy said her institution, a key building block of the euro zone’s banking union, was already assessing stress test data collected from banks, with results expected by November at the latest.

“If banks need capital in future then shareholders and creditors will have to step in,” she said. The new financial regulator said she understood political opposition in some countries at using the ESM to support banks. But, she argued, the credibility of the current stress test depended on having such a backstop in place.

‘Safety mechanism’

“We need a public safety mechanism to signal to markets that we want to carry out a serious and tough [stress] test and expect capital gaps that private investors may not be able to fill,” she said.“The success of the American stress tests were based on having a public security mechanism for such a case. This wasn’t the case with previous tests in Europe, which lead to considerable distortions.”

Opposition to the ESM – and using it to refinance banks – has been particularly vociferous in Germany. The establishment of the permanent bailout fund has helped buoy support for the new eurocritical party, Alternative für Deutschland.