The European Union needs a plan for cross-border bank failures that goes beyond financial services Commissioner Michel Barnier’s proposed cooperation measures, European Central Bank Vice President Vitor Constancio said.
Constancio called for a “true European resolution authority” to provide temporary support when necessary, in comments to the Centre for European Policy Studies in Brussels yesterday. He said national regulators on their own can’t work together enough to contain a major cross-border bank emergency.
“We need a European-level entity and fund that can deal with those cases,” Constancio said. “If the solution would be just coordination of national resolution authorities and a network of national authorities, than it cannot really address the cross-border question.”
Constancio was responding to comments Barnier made earlier this week that common EU resolution funds are politically unworkable. 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.
“We need to make proposals that will be accepted and we know the reservations of countries such as Germany,” Barnier said in a Feb. 26 Bloomberg Television interview.
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 the forthcoming resolution plans need to acknowledge German reluctance to take on more cost-sharing of backstops. Euro-area nations already contribute to a 500 billion euro ($655 billion) firewall. Five of the currency bloc’s 17 countries have sought aid.
Fears of big bailout tabs from bank failures, and the “mutualization of liabilities,” are overblown, Constancio said yesterday. He said authorities can augment an industry-funded backstop with temporary support for a so-called bridge bank, and costs can be recovered from creditors afterwards.
As a precursor to the central resolution authority, the EU has proposed a plan to standardize national deposit insurance programs 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.
Constancio said these rules need to be augmented by a central fund, similar to the Federal Deposit Insurance Corp. in the U.S., which can step in to manage the process of shutting down a failing bank.
“Bailout of banks is for governments to do, if they wish and can do it,” Constancio said. “Here it’s for resolution, which means funding by the sector itself and then the pecking order” of creditors who are in line to absorb losses.
“In the end, this does not imply any serious amount of public money,” Constancio said.
ING Group Vice Chairman Koos Timmermans said banks may have a tough time complying with complex capital and financing requirements across their corporate structure in multiple jurisdictions. At the same time, he said, regulatory coordination may be difficult as long as individual governments stay responsible for any bailout costs.
“As long as the local taxpayer pays, it is very difficult to harmonize rules,” Timmermans said at the CEPS event yesterday.