Barnier Says German Bank-Failure Strategy Leaves Bloc Vulnerable

German plans to water down a euro-area plan for handling failing banks would leave the currency bloc vulnerable in future financial crises, European Union financial-services chief Michel Barnier said.

Barnier said a deal to set up a centralized Single Resolution Mechanism for banks in the 17-nation currency bloc could be achieved as early as the end of 2013, allowing the system to be put in place in the second half of 2014.

“What’s important to me is that what we do works,” Barnier said in an interview in Vilnius, Lithuania, during a two-day meeting of EU finance ministers that began today. “To work, it can’t be simply a network of national authorities. It must be something that functions at European level.”

EU leaders called last year for euro-area countries to put in place joint oversight and crisis management of lenders in a bid to repair confidence in the solidity of the bloc’s banking system. While governments have approved the project in principle, plans presented by Barnier in July to centralize decisions on how to resuscitate or wind down an imperiled bank have met staunch opposition from Germany, which argues that the proposed measures are illegal.

Wolfgang Schaeuble, Germany’s finance minister, has called for Barnier’s plan to be scrapped in favor of a networked approach in which national authorities would cooperate in dealing with a cross-border bank failure. Any more ambitious steps, he has said, would have to wait for changes to the EU’s founding treaties, which place limits on the centralization of power.

National Authorities

“We have seen the limits of just simply bringing together national authorities when it comes to resolving a bank,” Barnier said, citing the example of prolonged haggling between regulators over the dismemberment of Franco-Belgian lender Dexia SA. (DEXB) “We have to learn the lessons of our weakness.”

“The point of agreement I have with Germany is that I think, like Wolfgang Schaeuble, that the steps we are taking now could certainly be improved upon and consolidated by a future modification of the treaties,” he said. “I haven’t got a problem with that.”

Such a possible treaty change could include changing the status of the European Stability Mechanism, the euro area’s bailout fund, he said.

“Improvement and consolidation of the system is possible with a future modification of the treaty, but we have a duty to act now, to deal with the crisis now,” he said.

Failing Banks

Plans for the Single Resolution Mechanism to be backed by a common 55 billion-euro ($73 billion) fund that could be tapped to stabilize failing banks don’t have sufficient safeguards to protect national budgets, lawyers for the EU Council of Ministers, an institution representing the executives of the bloc’s 28 member states, said in a written opinion dated Sept. 11.

Still, the problem could be solved by drafting changes to Barnier’s proposal, the legal service concluded.

“But the opinion expressed by the council legal service, and that expressed by the commission’s own legal service, allow us to think that we can build a European system of bank resolution in the framework of the current treaties,” Barnier said.

The European Central Bank, which as part of the banking union project is set to take on supervisory responsibilities as early as October 2014, has said the resolution system should be up and running as soon as possible after it assumes its oversight role.

“We, as the commission, will do all we can in discussions with ministers, and with the European Parliament, to make the European system of financial resolution operational, and to have it in place, like the ECB wants, in parallel with the single supervisor,” Barnier said.

“I am confident in our ability to reach a dynamic compromise on this proposal that I made in July, and to find it in the coming months,” he said.

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

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

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