EU Deadlock Broken as Ministers Agree to Bank Plan

Photographer: John Thys/AFP/Getty Images

“This is the final building block of the whole banking union,” Jeroen Dijsselbloem,the Netherlands's finance minister and president of the Eurogroup, told reporters after the meeting. “We make the banking sector responsible for their own risks and their own losses. That is an economically healthy way to approach the banking business.” Close

“This is the final building block of the whole banking union,” Jeroen Dijsselbloem,the... Read More

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Photographer: John Thys/AFP/Getty Images

“This is the final building block of the whole banking union,” Jeroen Dijsselbloem,the Netherlands's finance minister and president of the Eurogroup, told reporters after the meeting. “We make the banking sector responsible for their own risks and their own losses. That is an economically healthy way to approach the banking business.”

Germany and France backed an agreement on how to deal with failing euro-area banks, closing ranks on the next step in crisis-fighting before governments hammer out details with the European Parliament.

German Finance Minister Wolfgang Schaeuble and France’s Pierre Moscovici met in Paris to bless an accord reached late yesterday by European Union ministers in Brussels. They pledged a 55 billion-euro ($75 billion) industry-financed resolution fund over 10 years, backed an agency to make decisions on handling failing banks and agreed on cost-sharing procedures.

“We’re not over the hill, but we’ve come a good way,” Schaeuble said today. “The establishment of the banking union is the most important element of the coming years.”

In delivering the agreement on a Single Resolution Mechanism that leaders demanded before a summit today, the finance chiefs overcame conflicts that pitted big nations against small ones, euro members against those outside the currency bloc, and Germany’s desire to shield taxpayers against European Central Bank calls for central control.

Battles now will move to the European Parliament, where legislators have voiced opposition to being cut out of some of the process. The banking-union endeavor was born in June 2012 as EU leaders struggled to contain the damage of the euro region’s financial crisis and prevent further shocks, and portends a deepening of euro-area coordination.

“The aim is to break the vicious circle between banks and governments,” Moscovici said.

Parliament Role

The legislature and nations this week agreed on standards for deposit-guarantee schemes, though they failed yesterday to reach agreement on a financial-markets bill known as Mifid, which would toughen derivatives-market regulations.

The EU is racing to complete its banking legislation before May, when the parliament stops work for new elections. Resolution, the process of restructuring or shutting down a failing bank, has taken center stage now that the ECB will become euro-area bank supervisor next year. The goal is to reassure EU leaders and financial markets that the bloc can take action when its biggest banks teeter.

German Chancellor Angela Merkel led calls for the ministers to find some sort of accord before leaders arrived in Brussels. Meanwhile, ECB President Mario Draghi pressed for simpler decision-making channels so the agency could act quickly when needed.

Decisions Postponed

To reach agreement, finance ministers postponed decisions on how they’ll jointly stand behind the new system for handling struggling banks.

Michel Barnier, the EU’s financial-services chief, called it “momentous” day for the march toward banking union. Barnier said after yesterday’s talks.

“The great success of tonight includes many positive points and leaves a few important things that we should work on with the European Parliament to improve,” he said, in reference to the upcoming negotiations between governments and the assembly.

A common public backstop to be developed in coming years would give banks access to a firewall like the European Stability Mechanism created for euro-area sovereign debt, said Italian Finance Minister Fabrizio Saccomanni.

“We have reached an historical agreement, almost on par with the historical agreement that established the monetary union,” Saccomanni told reporters after the meeting. “Such an agreement should pacify markets” and prevent contagion if a big bank collapses, he said.

Two-Track Process

After 12 hours of talks on the second day of Brussels negotiations, ministers moved ahead with a two-track process for birthing the resolution system. The SRM agency will be created through EU legislation -- clearing both the parliament and national governments -- while financing arrangements will be set up through a separate agreement among nations.

This separate agreement would be a “devastating blow” that short-circuits democratic processes, Sharon Bowles, head of the parliament’s economy committee, said earlier this week. The parliament settled on its own negotiating procedure this week, endorsing a more centralized system that gives decision-making powers to the Brussels-based European Commission and setting the stage for fights next year.

Non-euro nations demanded and received assurances that their finances wouldn’t be on the line if the new agency ran into trouble. A U.K. government spokesperson said the agreement ensures British taxpayers won’t be liable for resolution costs.

ECB Aim

To simplify decision making, as the ECB had sought, ministers opted to hand most responsibilities to a board of EU authorities and national representatives. The European Commission would be able to weigh in, and national governments would have final say through a vote of the Council of the European Union. The council would need to decide within 24 hours, according to draft documents prepared for the meeting.

The SRM plan calls for the bank-levy fund to be divided into national compartments over a 10-year transitional period. During that time, if demands on the fund exceed available cash, bridge financing could be secured from affected nations.

“The way things will work in practice is if a backstop were necessary, a large amount of money would be needed pretty much straight up and then it would have to be replenished subsequently by levying the industry,” Irish Finance Minister Michael Noonan said. “So as long as the principle that the industry pays is established, I’ll agree it.”

The 500 billion-euro ESM won’t play a role, unless nations exhaust their access to the bank-funded pool. In those cases, a country could apply for a bailout like the ones granted to Spain and Cyprus.

“If member states aren’t able to meet their commitments, they can resort to the solidarity of member states in the ESM,” Schaeuble said. “We will have two financing circles: the ESM, as the solidarity fund, under agreed conditionality, and on the other hand the European resolution fund.”

To contact the reporters on this story: Rebecca Christie in Brussels at rchristie4@bloomberg.net; Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net; James Hertling at jhertling@bloomberg.net

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