European Union finance ministers will try to break a deadlock tomorrow on a euro-area bank-failure authority that the European Central Bank says is vital to the bloc’s efforts to prevent future financial crises.
The ECB begins to supervise euro-area banks next November, and wants a “strong and independent” resolution authority with a central fund to cover the cost of saving or shuttering lenders. That puts it at odds with German Finance Minister Wolfgang Schaeuble, who prefers a network of national regulators and has led opposition to EU financial-services chief Michel Barnier’s proposed Single Resolution Mechanism.
EU nations have made scant progress toward a compromise since Barnier introduced his plan in July. Now they’re staring at a year-end deadline set by the bloc’s leaders. The most contentious issues they face are the common fund, the scope of the mechanism and the question of who’ll have the final say in ordering a bank closure.
“A situation where regulation is happening in Frankfurt, but the repair or the recovery of a bank takes place in the 18 countries of the euro, will not go well for long,” Jan Sijbrand, director for supervision at the Dutch central bank, said Nov. 25. “That is a recipe for disaster.”
Schaeuble hosted Barnier, ECB Executive Board member Joerg Asmussen and finance ministers from France, Italy, Spain, the Netherlands and Lithuania in Berlin on Dec. 6 to discuss the plan before tomorrow’s EU meeting. Lithuania holds the EU’s rotating presidency and is responsible for driving legislative deliberations until the end of the year.
“We know all the various elements of what a final agreement could be,” Chantal Hughes, a spokeswoman for Barnier, said following that meeting. “And we are all committed to reaching a political agreement on the Single Resolution Mechanism before the end of the year. That is why negotiations are taking place day and night.”
EU leaders have made an agreement among nations on the bank-failure bill a top priority for their Dec. 19-20 summit meeting, with the goal of getting a final deal on the law with European Parliament lawmakers before the assembly goes into recess for elections in May. This has increased the pressure on finance ministers to deliver, since missing the deadline would see a loss of momentum as the new parliament gets organized.
Progress has also been stalled by the prolonged coalition talks in Berlin since Chancellor Angela Merkel’s party won a Sept. 22 election. Dutch Finance Minister Jeroen Dijsselbloem, who chairs meetings of his euro-area counterparts, said last month that no bank-failure deal could be reached until Merkel formed a government.
‘No Stable Basis’
On the first point of contention, the common resolution fund, Schaeuble has challenged Barnier’s reliance on Article 114 of the Treaty on the Functioning of the European Union, which he says provides “no stable basis” for winding down banks. He has proposed Article 352 of the same treaty, which requires unanimity, as the basis for a fund.
Dijsselbloem last week proposed splitting talks on the fund from the rest of Barnier’s plan, possibly offering a way to overcome German resistance. He acknowledged that the European Commission “and some member states still oppose” this option. Schaeuble hasn’t publicly commented on the Dutchman’s idea.
Dijsselbloem also laid out a new proposal for how the fund would work, calling for a system where each country’s banks pay into a national compartment that would be tapped first in time of crisis.
In the policy agreement reached by Merkel’s Christian Democrats and the Social Democrats, the two parties backed “a unified European resolution fund” filled by levies on banks. Until it’s up and running, national resolution funds -- and ultimately national governments -- would be responsible for their own banks, with the possibility of seeking a Spain-style bailout from the European Stability Mechanism.
On the second divisive issue, the scope of the resolution authority, the German coalition platform, which must still be approved by the Social Democrats rank and file, supports the creation of “a European resolution authority” that would cover “systemic, cross-border banks.”
Barnier’s proposal would place all euro-area banks within the SRM, though he has indicated a willingness to consider limiting its scope to cross-border institutions.
The difficulties in reaching an agreement on this point were revealed last month when Lithuania put forward revised texts that would give national regulators responsibility for drawing up resolution plans for smaller and non-cross border banks, only to then withdraw them in response to opposition from other governments.
Finally, finance ministers will grapple with the question of who has the power to order a bank into resolution. In Barnier’s plan, the European Commission plays this role. Germany has challenged this, saying that the Council of the European Union, the EU institution that represents member-state governments, should have the final say.
“A large majority” of EU nations consider that the final decision-talking role should be given to the commission, according to a Lithuanian note published on the EU’s website, and dated Dec. 2. “The Council is seen as the less efficient alternative due to a number of legal, procedural and timing constraints.”
Still, Germany’s position means that Lithuania has continued to draft alternative council-based solutions.
Other outstanding issues in the talks include how soon the EU should activate planned tougher rules on creditor losses at failing banks, with Germany among nations calling for an earlier start-date.
Ministers also need to tackle concerns raised by the U.K. and Sweden, two countries outside the euro area, that they could face unfair costs or be discriminated against unless safeguards are built into the text.
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