The European Union needs a strategy for handling failing banks that can win approval from the bloc’s member countries and incorporate existing tools, EU Financial Services Commissioner Michel Barnier said.
“We need to make proposals that will be accepted and we know the reservations of countries such as Germany,” Barnier said in a Bloomberg Television interview in Paris today. “We need to be pragmatic.”
Barnier renewed his call for the EU to leverage national resources as it determines how to restructure or shut down failing banks. The Brussels-based commission will announce proposals later this year for a European Resolution Authority, which Barnier says should make use of national funds rather than a central pot of money.
This approach contrasts with recommendations from European Central Bank President Mario Draghi, who said on Feb. 18 that the planned resolution authority will need its own funds. Banks should pay into this central fund, with European nations providing a backstop, he said.
To prevent a repeat of the sovereign debt and financial crisis that has crippled Europe for the past three years, the EU is working on a banking union to bolster financial stability and prevent contagion between banks and states. Bank resolution is the second part of the plan, following last year’s decision to give the European Central Bank oversight powers.
Barnier said resolution plans need to acknowledge German insistence on more cost-sharing. Euro-area nations already contribute to a 500 billion-euro ($655 billion) firewall. Five of the currency bloc’s 17 countries have sought aid.
“You have to differentiate between what’s possible today and what’s ideal tomorrow,” Barnier said.
As a precursor to the central resolution authority, the EU has proposed a plan to standardize national deposit insurance schemes and to create a common approach for handling failing banks. This interim legislation will call for nations to adopt so-called bail-in rules for imposing losses on creditors of failing banks.
“The resolution will be put in place in each country -- with a toolbox in each country -- so that banks pay for banks when they go bankrupt,” Barnier said. His plan calls for each country to have its own fund for handling bank failures that is funded in advance by fees on lenders.
“Once this is put in place we will work on better coordination between these various toolboxes at the European level,” he said. “This is the role that will be played by the European Resolution Authority that I will propose.”
Draghi said a common fund with a public backstop will be required, augmented by industry fees collected in advance of any crisis. Even if European authorities ultimately recoup their costs from the financial industry, making the fund “fiscally neutral” over time, they need to be prepared to fund short-term needs from their own resources, he said.
The single resolution authority “should therefore have a European resolution fund at its disposal, which should be financed by the private sector via risk-based ex-ante levies,” Draghi said. “The European resolution fund should be backed by a public backstop mechanism, the support of which would need to be recouped via special ex-post levies on the private sector.”
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