Europe’s banks nervously await shape of ECB stress tests
Most significant question surrounding the stress tests is who will pay for any capital holes that emerge
In the event that a bank needs more capital, new European Commission state aid rules would apply. These rules, which came into effect this summer, would introduce a level of burden-sharing in the event of a bank wind-down. It rules that a bank’s shareholders, junior bondholders and hybrid capital holders are wiped out before taxpayers’ money is used, though it stops short of enforcing losses on senior bondholders.
How far the European Commission will enforce these rules is still unclear, and national governments are likely to have a good deal of discretion on how to implement a bank resolution or restructuring.
Eurogroup chief Jeroen Dijsselbloem also set out a clear scenario in the event of capital shortfalls, explaining that banks would first have to seek additional capital from private investors, then apply the state aid rules before turning to national bank resolution funds or other assistance programs.
The outcome of next year’s stress tests is linked to the broader issue of banking union, the euro zone’s grand plan to sort out its financial sector .
Tense discussions on bank resolution and recovery have delayed agreement on the second phase of banking union, while the third pillar, a common deposit insurance scheme, now looks unlikely.
Germany has an aversion to any scheme that sees a pooling of responsibility for funding weak banks. It has also warned that changes to the EU treaties may be needed for some of the measures, including the SRM proposal. With Germany having garnered significant support for its position at last month’s meeting of finance ministers in Vilnius, the scheme is likely to be altered to take account of Berlin’s preference for a system of national but co-ordinated resolution authorities.
The prospect of some kind of middle-ground on the various stages of banking union worries analysts and investors. Philippe Gudin, chief European economist at Barclays Capital, said a delay in the full implementation of the banking union would be detrimental to the economic situation.
In a paper presented to euro zone finance ministers in Vilnius, Brussels-based Bruegel think-tank urged the eurogroup to implement banking union, highlighting the need to develop a cross-border equity and corporate bond market.
“Banking union is the central front in the management of the euro crisis right now, but it will not be enough to ultimately resolve the European crisis”, says Bruegel’s Nicolas Veron.
“This will require a much more integrated fiscal and institutional framework, including EU treaty change. Even under the most optimistic scenarios, we remain many years away from eventual crisis resolution.”