Germany and the U.K. rejected a European Commission proposal to turn a 50 billion-euro ($68 billion) rescue fund into a bank backstop for member states outside the single-currency bloc.
The European Union’s balance-of-payments fund currently has about 40 billion euros available, after being used to help Latvia, Hungary and Romania. The commission, the EU’s executive arm, now wants to overhaul the fund and add a tool for bank aid that could be tapped by non-euro countries whose lenders fail next year’s continent-wide stress tests.
Both Germany and Britain say the balance-of-payments mechanism isn’t intended for recapitalizing lenders. Officials at the finance ministry in Berlin and in the U.K. government, asking not to be named under their ground rules, also said it the backstop ease pressure on countries that need to strengthen their banking industries.
The Brussels-based commission wants a resource that can operate alongside the euro area’s 500 billion-euro firewall, the European Stability Mechanism, so that the entire 28-nation EU is braced for the results of next year’s stress tests. The goal is to reach a deal by the end of this year so that the tool can be ready by mid-2014, when the commission also hopes to have finished negotiations on when the firewall can provide direct aid to euro-zone banks.
“The commission has proposed that the balance-of-payments mechanism include a bank recapitalization instrument for the same reason that one is available for euro-area countries under the ESM: to provide a credible public backstop at the European level capable of reassuring supervisors and market participants that financial stability will be assured,” Simon O’Connor, a spokesman for the commission, said yesterday.
“This is particularly important in view of the forthcoming asset-quality review and stress tests, which need to strengthen confidence in the solidity of the financial sector in Europe,” he said.
The European Central Bank will be conducting balance-sheet reviews of major banks across the euro area as it prepares to take on new oversight duties in the second half of 2014. In addition, all EU banks will face a new round of stress tests, carried out by the ECB, national regulators and the European Banking Authority.
If all the proposed backstops are in place, the EU would have as much as 400 billion euros available to handle any banking problems that emerge. That includes 60 billion euros in possible direct bank aid from the ESM, 280 billion euros in ESM capacity for bank-assistance programs like the one Spain received last year and the proposed tool for non-euro member states, two EU officials said on condition of anonymity.
The German government sees the existing tools as sufficient to ensure financial stability, the finance ministry official said. If difficulties in the financial sector prove to be so serious that balance-of-payments problems arise, the member state concerned can already seek aid under a macroeconomic adjustment program, the German official said.
The U.K. official added that balance-of-payments aid is normally given in conjunction with the International Monetary Fund, and the IMF doesn’t bail out banks, making the proposal impracticable.
Supporters including France, Spain and Italy say the EU needs to show investors it’s braced to handle any problems that emerge after next year’s bank reviews.
While the EU can provide loans to member states from this fund on its own, “in recent practice the assistance has usually been extended in co-operation with IMF and other international institutions or countries,” according to the EU’s website.
“It’s crucial to ensure that countries outside the euro will be able to take part in the enhanced cooperation on banks on an equal footing with the euro nations,” Danish Economy Minister Margrethe Vestager said today. “The principle that the financial sector will pay its own bills, as we know it from Denmark and the directive on resolution, must also apply to the framework of a common resolution mechanism and resolution fund.”
Vestager said she was aware of the commision’s proposal to use the balance-of-payments mechanism. “But there may be other ways to do this that we’ll have to look into.”
The EU’s proposed bank-aid tool is part of a broader proposed overhaul to the balance-of-payments fund, which requires unanimous approval by EU nations. Tapping the fund requires countries to apply and to accept conditions, just as euro-area nations must enter a reform program to qualify for ESM aid.
Lawyers for the Council of the European Union, which represents member states, have said the bank-aid proposal would need to be revised to show a direct link to the wellbeing of the country in question, the officials said. The commission is working on revisions to accommodate that concern, they said.
“Not much thought has been given yet to an additional difficult issue: how to treat non-euro-area countries that are part of the banking union,” Klaus Regling, the ESM’s managing director, said this week. “I think a solution has to be found.”
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