Plan for EU bank rescue scheme gets go-ahead

 

OVERVIEW:EU leaders have given the go-ahead for a plan to create a pan-European bank rescue mechanism in which any public funding would be clawed back afterwards from the financial industry.

The scheme, to be developed next year by the European Commission, has potentially far-reaching implications for countries like Ireland that are struggling to overcome deep banking crises.

The “single resolution mechanism” plan is separate to contentious plans to use the ESM bailout fund to rescue banks directly. In principle at least, it could be used to tackle large historic debts built up by crippled banks in the course of the financial crisis.

The objective remains that the resolution scheme would be fully funded eventually by financial sector levies. However, there would not be enough proceeds from levies in the first instance to rescue many banks.

As a result, EU leaders have accepted the principle that member states could pool public money for that purpose to get the scheme under way.

Only afterwards would the money be recouped from the financial sector via levies charged at a later date.

Summit conclusions signed off by all EU leaders, including German chancellor Angela Merkel, state that the new anti-crisis backstop should be “neutral” for their public finances in the medium term. This implies that Germany would agree to provide money upfront for bank rescues in other countries on the proviso that the money would be repaid later by the financial industry.

Any such measures would break new ground and could, eventually, be used to help countries such as Ireland. However, the plan is at an early stage only.

Contributions

Although detailed operational measures remain to be pinned down by the commission and agreed by member states, the implicit acceptance of public assistance being used in the first instance is seen in diplomatic circles to be very significant.

“The single resolution mechanism should be based on contributions from the financial sector itself and include appropriate and effective backstop arrangements,” the summit conclusions state.

“This backstop should be fiscally neutral over the medium-term, by ensuring that public assistance is recouped by means of ex post levies on the financial industry.” The creation of such a resolution mechanism ranks among the next steps in the “banking union” initiative, through which EU leaders hope to break the connection between bank and sovereign debt.

Following agreement this week on new powers for the European Central Bank to supervise commercial banks, discussion turn in the new year to two new initiatives .

In addition to the new resolution plan, this embraces separate measures to harmonise the protection of bank deposits throughout Europe.

June deal

EU leaders want a deal on both fronts by June next year, meaning Ireland’s incoming EU presidency will be tasked with securing agreement between governments and with the European Parliament.

While these questions are to be prioritised for immediate political action, the leaders shelved longer term plans to examine further changes to the EU treaties to toughen fiscal discipline in the euro zone.