December 11, 2013 12:31 am

EU sets out framework for banking union

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EU finance ministers on Wednesday framed the political bargain for the eurozone’s next big step towards banking union, but put off the fight over the crucial details of sharing bank failure costs until next week.

A marathon negotiating session in Brussels produced a draft compromise, broadly based on Germany’s revised position, which sets out how eurozone countries cede power to a central bank resolution authority and establish a common funding network.

While the basic parameters are likely to survive in a final deal, several countries raised strong objections to Berlin-backed conditions that slowly phase in a single resolution fund – and gives big countries a greater say on when it can be used.

These voting arrangements and financing details – including the unaddressed issue of what happens should the bank resolution funds be exhausted – will be left to a final emergency meeting next Wednesday, on the eve a summit of EU leaders.

“The ministers have done a lot of the work that is needed but we are not at the end of the road yet,” said Michel Barnier, the EU commissioner responsible for the reforms.

A deal this year would mark the biggest surrender of sovereignty since the creation of the single currency, establishing a resolution system from 2016 to act as a match to the single supervisor at the European Central Bank.

The draft compromise would establish a resolution board directly responsible for proposing decisions to recapitalise or wind up all cross border eurozone banks, should they face difficulties.

Its plans would need the approval of the European Commission or – in the event of Brussels rejecting a board proposal – a majority vote of banking union member states. A bank’s home state would have a veto if a bailout requiring public funds were required.

Germany gave ground to accept the eventual establishment of a €55bn single resolution fund in a decade’s time, paid for by an industry levy. During a transition of up to 10 years, the system would be based on a network of national resolution funds, with an intergovernmental treaty defining how costs can be shared.

Rules to impose hits on senior bondholders in failing banks are also brought forward from 2018 to 2016, a key German demand to ensure there is likely to be a smaller capital gap for rescue funds to cover.

The details of how this system of funds operates marks the biggest point of friction among member states.

In the compromise, big countries are given greater voting power to block the release of common resolution funds; almost no finance ministers spoke in favour of the voting arrangement. The requirement for a two-thirds majority, based on the European Central Bank capital key, would for instance give Germany, the Netherlands and Finland a blocking minority.

Another point of tension will be the details for phasing in the single resolution fund and providing an additional source of emergency finance, should its resources prove insufficient.

When the fund is first established national resolution funds will shoulder the responsibility for funding the winding-down of a national bank. During a decade-long transition period when the fund is built up, the potential for mutual support is gradually increased, subject to a vote.

Ministers will also need to resolve the thorny issue of a backstop for the fund. Pierre Moscovici, French finance minister, made clear that Germany was “still opposed” to allowing the eurozone’s €500bn rescue fund, the European Stability Mechanism, offer a credit line during the transition.

While the use of an intergovernmental treaty was a critical to addressing Germany’s legal concerns on the original proposal, it potentially creates problems when negotiations begin on final legislation with the European parliament, which dislikes pacts outside existing EU treaties.

“I can imagine the parliament will not be enthusiastic about such a situation and neither is the commission,” said Mr Barnier. “But a compromise must be found.”

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