December 13, 2012 7:29 pm

Battle looms over failed lenders

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One exhausted EU official dubbed it “the miracle”. But before a legal text on creating a single bank supervisor had even been released, the battle lines were already drawn over the next phase of banking union: joint rescues for failed banks.

This first step – common supervision – was close to unthinkable at the beginning of this year. When European finance ministers agreed at 4am on Thursday to surrender oversight of national lenders to the European Central Bank it did, after all, represent the most ambitious integration scheme since the creation of the single currency.

EU banking union chart

EU banking union chart

But the architects of Europe’s nascent banking union know that it is “house half built”. Common supervision must be followed by a common means for winding up troubled lenders – and a common financial backstop for dealing with a banking crisis.

“Getting them to agree to transfer powers was hard enough,” said one senior official closely involved in the four months of gruelling talks. “Resolution is inevitably about money and that will be a different order of difficulty.”

The next stop on the road to banking union is to align, within the next six months, the indispensable national rules covering everything from bank capital requirements to the emergency powers governments have to deal with ailing banks.

This is the so-called single rulebook. But it remains at national level, providing a common language across 27 member states, rather than a centralised system.

There is dispute about how quickly to push forward with much more ambitious plans for a European resolution authority and backstop. France and Germany are already at odds over timing and scope. It is the beginning of a long and contentious fight.

Without a European framework for handling failing banks, critics argue, the ECB would be hamstrung. Supervision would be centralised, but the bill and ultimate authority to wind up a bank would remain national.

“That simply will not work. We just have to hope it is not tested,” said one senior EU official.

More optimistic diplomats see the supervision breakthrough as a turning point. “Psychologically, we crossed a line,” said one senior eurozone official. “We managed what was thought to be impossible. The choices, in a way, now become much easier; the logic is remorseless.”

France wants the European Commission to bring forward negotiations on setting up the EU resolution regime. Even fiscally conservative Finland is open to the idea.

“We don’t want to stand on the brakes,” said Jyrki Katainen, the Finnish prime minister. “If the commission wants to start preparing a common resolution mechanism, that’s fine with us.”

Berlin is less convinced. Before new initiatives, it wants progress on existing national reforms. It is not sure that a common European resolution framework is urgently necessary. And it is certainly not satisfied that a common backstop or resolution fund is required. Germany is as reluctant as ever to share financial risk at a central level.

This opens a familiar debate for Brussels, echoing the question of whether the eurozone’s €500bn bailout fund should recapitalise banks directly. The crisis-fighting tool was one of the main benefits from central bank supervision. But Germany wants to avoid raising “dangerous” expectations that it will be used.

Indeed, one reason for the ECB supervision start date being delayed to March 2014 or later was to avoid such requests. Wolfgang Schäuble, the German finance minister, said that direct recapitalisation would be legally possible, but added that it was “a relatively unlikely scenario”. It would, of course, require approval of the German government and its parliament.

More important for Berlin is ensuring the ECB manages the Herculean task of making central supervision a reality for 200 or so banks by 2014. That means setting rules, hiring staff, harmonising approaches and deftly managing relations with prickly national supervisors. For some German officials, the to-do list is long enough.

Looming large over the debate are the Bundestag elections. German opposition leaders are already accusing Angela Merkel, the German chancellor, of deliberately delaying ECB supervision to 2014 to keep the question of resolution out of next year’s campaign.

Sigmar Gabriel, chairman of the centre-left Social Democratic party, said the chancellor was “playing hide and seek” over banking union by agreeing the principle of recapitalisation while delaying its use beyond 2014.

Frustrations are growing in the EU, too. Enda Kenny, Ireland’s prime minister, said EU leaders were “quite clear” that the option of recapitalisation followed a deal on supervision. “It is important the citizens of the union actually see decisions being made and followed through,” he said.

Additional reporting by Peter Spiegel and Jamie Smyth in Brussels

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