May 12, 2013 7:43 pm

Schäuble warns EU bank rescue agency needs treaty changes

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German Finance Minister Wolfgang Schäuble©Getty

German Finance Minister Wolfgang Schäuble

Germany’s finance minister has warned that a single EU bailout agency and rescue fund for ailing banks is legally untenable until the bloc’s treaties have been overhauled.

In today’s Financial Times, Wolfgang Schäuble calls for a “two-step approach” that would leave bank rescues in the hands of “a network of” national authorities until treaty changes can take place.

Mr Schäuble’s declaration comes just weeks before the European Commission is due to present its plan for a single bank resolution agency and rescue fund – widely touted as the second pillar in the eurozone’s much-vaunted “banking union” – throwing the proposal into doubt even before it is unveiled.

“The EU does not have coercive means to enforce decisions. Its historical roots are young. Its democratic legitimacy could be improved upon,” Mr Schäuble writes. “What it has are responsibilities and powers defined by its treaties. To take them lightly, as is sometimes suggested, is to tamper with the rule of law.”

A single EU bank resolution authority was originally designed to take bank oversight and rescues out of the hands of national capitals where lax regulation and massive bailouts helped exacerbate the eurozone crisis.

The plan acquired new urgency after March’s botched €10bn Cyprus bailout, where Cypriot account holders had their deposits used to help pay for bailouts of the island’s two biggest banks.

Lawyers for the European Commission and the European Central Bank, which has joined Brussels in pushing for quick adoption of a resolution authority after last month’s creation of a common EU bank supervisor in Frankfurt, have argued that existing treaties allow for centralising powers to shut down or restructure weak banks.

But Mr Schäuble writes that the treaties “do not suffice to anchor beyond doubt a new and strong central resolution authority”. He added that promises to create an authority quickly would cost the EU credibility, saying: “We should not make promises we cannot keep.” Even limited changes to EU treaties can take months if not years.

While he acknowledges his “two-step” plan would lead to “a timber-framed, not a steel-framed, banking union”, Mr Schäuble said it would be adequate until treaties were changed. However, the ECB has expressed concern about keeping resolution at a national level after centralising bank supervision, saying it would undermine Frankfurt’s ability to make independent judgments about a bank’s health.

Mr Schäuble has raised such concerns with counterparts before. But this is the first time that he has made such an explicit treaty change demand. It is also the first time that Berlin has presented the alternate “two-step” plan, which would see the “network of national authorities” start once three criteria are met: when the new EU supervisor is operational; EU banks are fully capitalised to Basel III levels; and new standards are agreed for national resolution authorities and funds.

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