ECB Says Bank Crisis Plans Risk Harming Deposit Guarantees

The European Central Bank said the European Commission’s plans to handle the failure of large lenders may threaten its independence and could damage confidence in national guarantee programs for bank deposits.

ECB Vice President Vitor Constancio made the remarks during a debate on a draft law with finance ministers in Brussels today. Some ministers also raised concerns about the proposal, which Michel Barnier, the European Union’s financial services chief, has described as a “cornerstone” of the bloc’s efforts to build a so-called banking union.

There is a “potential difficulty” with how Barnier’s proposal would interact with deposit-guarantee programs, Constancio said. It’s necessary to avoid “any doubts of the citizens” on the capacity of such plans to honor their commitments, he said.

Regulators have called for enhanced powers to handle bank failures as part of measures to take taxpayers off the hook for bailouts. The commission’s proposal, made on June 6, would require nations to set up bank-financed funds to support crisis- hit lenders. These funds would be allowed to borrow from central banks in an emergency and would have to lend to each other as a last resort. Nations would have the option to merge these reserves with their deposit-guarantee programs.

‘Resolution Fund’

Governments and lawmakers in the European Parliament must approve Barnier’s draft law before it can take effect.

The ECB opposes plans to allow the funds to tap central banks for loans, Constancio said, adding that this couldn’t apply in the euro area because the ECB cannot provide such support. The measure “goes against the spirit of the treaty in what regards the independence of central banks from financing tasks that belong to the governments,” he said.

Constancio said the ECB supports the creation of a “European resolution fund” to handle crisis-hit banks.

Ministers have signaled concern that the bank-financed funds would prove insufficient and that the proposals would concentrate power with supervisors in countries where major lenders are headquartered at the expense of authorities in nations that host subsidiaries and branches.

The proposed funding arrangements “will not be enough,” said Luc Frieden, Luxembourg’s finance minister. “There will always be indirect costs for government.”

Similar problems would confront a single European fund, Frieden told reporters after the meeting.

‘Enormous Amount’

“The idea that all banks could be saved with this fund is a good idea, but it’s also a bit naive in the sense that there has to be an enormous amount of money in this pot so that this pot, this resolution fund, can later save all banks in Europe,” Frieden said. The refinancing needs of some Spanish banks has shown “what enormous sums of money are needed,” he said.

Mario Monti, Italy prime minister and finance minister, said the commission plans are “not ambitious enough” because they build on a “decentralized,” national approach.

Policy makers including EU President Herman Van Rompuy have called for nations in the euro region to create a banking union with a single supervisor for lenders and common financial backstops for dealing with crisis-hit banks.

Single Supervisor

Euro-area leaders on June 29 endorsed the creation up of a single supervisor, involving the ECB. They said that once this is established, the euro area’s permanent bailout fund, the European Stability Mechanism, could recapitalize banks directly.

Barnier should outline how to make his proposal from June 6 “more consistent with the more ambitious direction put forward in the Van Rompuy report,” Monti said.

Barnier said after today’s meeting that he would make a proposal in September to establish a single banking supervisor that would serve as a vanguard for further measures to build a banking union. The commission’s subsequent steps may include proposing amendments to draft laws on deposit guarantees and bank-capital requirements, as well as to the June 6 proposal for crisis resolution, he said.

The banking-union measures would benefit all 27 EU nations and are “essential” for the 17 countries that use the euro, Barnier said. Still, it will be possible for some nations to opt out, leading to “different degrees of engagement.”

The commission plan for a single supervisor will hand powers to the ECB while preserving the role of the European Banking Authority, Barnier said. The EBA coordinates the work of regulators in the EU, and has some power to settle disputes between them.

The single supervisor should have the power to directly regulate all lenders in countries that participate in the banking union, while delegating some tasks to the national level, Barnier said. It should be in place by the end of 2012.

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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