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EU agrees on a plan to close failing lenders
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The European Union agreed yesterday on a blueprint to close failing banks but stopped short of a more ambitious plan for the eurozone to unite in tackling its troubled lenders.
More than five years since a financial crisis struck, Europe is on the verge of finalizing one of its most ambitious reforms since the launch of the euro — an agency and fund to shut problem banks as soon as the European Central Bank starts to police them next year.
Finance ministers from across the bloc sealed a broad agreement on this final element of banking union.
European leaders, who were to gather in Brussels late yesterday, will sign off on it and the final touches will be made in negotiations with the European Parliament next year.
“The final pillar for the banking union has been achieved,” Germany’s Finance Minister Wolfgang Schaeuble said.
The project’s aim is to prevent a repeat of the turmoil when failing banks in countries from Ireland to Cyprus brought their states to the brink of bankruptcy.
Watered down deal
By setting up a system to shutter troubled lenders, Europe would equip the ECB with the means of dealing with teetering banks. However, the scheme that has emerged, because of efforts to accommodate skeptical countries, is unwieldy.
It requires the ECB to fire the starting shot by declaring a bank as too weak to survive. What follows, however, involves input from a new agency empowered to shut banks, the European Commission and up to 18 different eurozone countries.
Schaeuble played down concerns this could prove cumbersome. “It has to go quickly in an emergency, over a weekend,” he said, adding the new structure would be nimble enough to do so.
Michel Barnier, the European commissioner in charge of financial regulation, expressed frustration with the watered down deal.
“When I compare it with my original proposal I have regrets,” he said. “I would like to have seen things done otherwise.”
The ECB, which also lobbied for a simpler system, achieved limited success in its suggestion for a fast-track procedure to decide the fate of a sick bank.
It now remains to be seen whether the European Parliament, which also has a say in the law, will approve the scheme.
Sharon Bowles, one of its most influential members, earlier warned lawmakers would stop any scheme that allowed “politics and bully tactics.”
“We do not want any more fiascos like those witnessed with Dexia and Fortis,” she said.
Despite the progress, central elements of the banking union are still missing. For one, Germany continues to stand firm against the use of eurozone money to back a scheme for tackling troubled banks.
Schaeuble earlier made clear no money from the eurozone’s rescue fund, the 500 billion euro (US$684 billion) European Stability Mechanism, would be available directly for bank clean-ups.
Instead, a government struggling to pay for a failing bank will have to ask for an ESM bailout, a humiliating step with strict conditions attached.
That deals a blow to a central tenet of banking union as it was originally conceived, namely that weak governments should not be left to cope with banks whose problems can buckle a country.
Unlike in the US, where the federal government can transfer funds to help weaker states, countries in the eurozone do not send such aid. Germany, which makes up more than a third of the eurozone’s economy, wants to keep it that way.
Instead, eurozone ministers agreed that banks will pay into funds for the closure of failed lenders, amassing roughly 55 billion euros (US$76 billion) over 10 years.
French Finance Minister Pierre Moscovici is one of many ministers who still harbor hopes Germany will make further concessions in talks over the coming weeks. “We wanted a backstop,” he said. “We are working on its definition, which will evolve over time.”
Schaeuble, however, emphasized that new rules to impose losses “first and foremost” on a failing bank’s investors and creditors reduced the need for governments to step in.
Jeroen Dijsselbloem, the Dutch finance minister, also said this new order had overtaken the need for any joint backstop.
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