Last updated: December 9, 2013 6:22 pm

Germany and France close on banking union deal

Pierre Moscovici©AFP

Pierre Moscovici, French finance minister

Europe is on the brink of a banking union deal that will bring a “real revolution” to its financial system, France’s finance minister predicted, as he signalled differences with Germany on a system to fund failed banks were narrowing.

Pierre Moscovici said it was essential any deal included a single, central rescue fund for dealing with failed banks, something that Berlin has resisted, favouring a network of national funds instead.

But Mr Moscovici indicated a compromise that would combine both German and broader EU demands was in the works following a meeting in Berlin last Friday of key countries and EU officials convened by Wolfgang Schäuble, German finance minister.

“We have to build compromises,” Mr Moscovici told the Financial Times ahead of a meeting of finance ministers in Brussels. “There has to be both a single resolution fund and a role given to national input. That is not a contradiction. It is an articulation between them that we are seeking.”

The details of how this hybrid scheme – essentially a network of national funds under a single EU umbrella – will operate is likely to be one of the most contentious elements of a final deal. In any event, such a fund will take 10 years or more to reach its target level of about €55bn.

Germany has dropped objections to the European Commission, the EU’s executive arm, becoming the main authority for winding up failed banks – as long as no public money or significant resolution funding is required.

Berlin is also showing openness to a single eurozone rescue fund financed by bank levies, as long as there are clear safeguards that ensure senior creditors and national resolution funds shoulder the costs before European funds or taxpayers do.

But the German government is still voicing objections to the legal structure underpinning the fund, saying it must change before they sign on or it risks a court challenge. A solution could include basing the fund on an intergovernmental agreement outside EU treaties.

In addition, Berlin is demanding limits on the amount of funds that can be pooled by the EU and bigger voting rights for national capitals when approving the release of significant amounts of cash from the new resolution fund.

France has been among those countries arguing for Brussels to be in charge of triggering a bank closure and have access to a common fund to share the costs of closing failed banks.

“There has to be a governance process closely tied to the European Commission and there must be a clearly identifiable financial backstop,” Mr Moscovici said. “But a single resolution fund is a necessity. I think that is a key to the discussions, but a key that is in the process of turning.”

He said the process of rescuing a distressed bank should start with forced “bail-in” losses on creditors, followed by a contribution by national authorities and only resorting in the last instance to eurozone rescue funds.

Part of the compromise with Berlin may involve bringing forward rules to impose losses on senior creditors in failed banks from 2018 to 2016 so that Germany is more comfortable EU funds will be used only as a last resort from the start. But Berlin is likely to resist making the European Stability Mechanism, the eurozone’s €500bn rescue fund, a readily accessible backstop for banks.

“Our idea is that there will be a bail-in, then a recourse to the resolution fund, then a recourse to backstops starting with the European Stability Mechanism. There is a sequence there which should also be found in the application of the bank resolution mechanisms,” Mr Moscovici said.

He added that agreement on banking union would amount to “a real revolution because it will allow us to put an end to the financial fragmentation that has characterised the eurozone and to put in place co-operation mechanisms that were nonexistent, solidifying the European financial system”.

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