European Union finance chiefs struck an agreement on how to handle failing banks, a step they said would bolster investor confidence and help overcome the euro-area financial crisis.
In seven hours of emergency negotiations in Brussels that wrapped up at about 1:30 a.m. today, ministers settled on guidelines for assigning losses to private creditors and regulating public assistance. They also spelled out when governments can step in and established a role for the European Stability Mechanism, the euro area’s 500 billion-euro ($651 billion) firewall fund.
“It took a long time and it was arduous and it was intense,” German Finance Minister Wolfgang Schaeuble told reporters after the meeting. He said the deal is an “important step” toward making clear “that shareholders and creditors are liable first and foremost.”
The deal came hours before EU government leaders meet to take stock of the progress toward their 2012 pledge to break the cycle of contagion between banks and sovereign borrowers. The European Central Bank is due to oversee financial supervision in the euro zone next year, the first stage in a strategy combining new EU resolution procedures along with national backstops.
The cost of insuring against losses on senior bank debt fell for a third day, with the Markit iTraxx Financial index of credit-default swaps dropping 2 basis points to 166 basis points. Financial shares declined, as the Stoxx 600 Index of banks slid 1 percent at 10:40 a.m. in Brussels.
Now that EU nations have agreed among themselves, they can start talks with the European Parliament on a final version of the bill. EU financial-services legislation must be agreed between nations and the assembly. The legislature’s text grants nations a clear right to nationalize failing banks, if the step is seen as essential to preserve financial stability.
While nations endorsed the banking-union project in principle last year, Germany has indicated that it disagrees with the European Commission’s blueprint, warning that a strong central resolution authority, backed by a common bank fund, goes beyond what is possible under current treaties.
Today’s deal shows that none of the EU’s 27 members has abandoned the framework. The meeting of finance ministers was called after 19 hours of talks in Luxembourg dissolved at 3:30 a.m. on June 22, amid recriminations over which creditors face writedowns and when nations would be allowed to step in.
French Finance Minister Pierre Moscovici said France got “what we wanted” by ensuring a role for the the ESM. “It would not have been coherent on the one hand to put in place a direct mechanism for recapitalization by the ESM and on the other to exclude the ESM from the game of flexibility,” he told reporters today.
To reach a deal, ministers had to decide when countries could declare that a financial-system threat is grave enough to trigger exceptions to the loss formula. The aim was to find a middle ground between nations such as France, the U.K. and Sweden, which stressed the need for regulators to be able to adapt their approach to events on the ground, and countries such as Germany, the Netherlands, and Finland, which wanted predictable rules.
Swedish Finance Minister Anders Borg said the accord leaves open the path for nations to take stakes in their most important banks. Sweden also won other concessions that he said lay a foundation for talks with the European Parliament.
“We have achieved a cornerstone from our starting point,” Borg said today. “There is a reasonable degree of flexibility when it comes to inject capital into banks.”
Nations that had fought to limit flexibility, under concern that it would raise funding costs for banks whose nations can’t or won’t use bailouts, also endorsed today’s deal.
“It’s a balanced compromise,” Danish Economy Minister Margrethe Vestager said. “The way that you earn flexibility, that road also goes through bail-in” which “sends a very sound and healthy signal that bail-in is the main rule.”
The ministers’ agreement requires regulators to write down creditors, in order of seniority, until 8 percent of the distressed bank’s liabilities are wiped out, before they could grant exemptions and turn to national backstops instead. The deal offers some wiggle room for regulators, after notifying the European Commission, to exempt some creditors and shift the burden to others.
When government backstops are tapped, the first in line would be national resolution funds that countries finance by levies on their banks. The deal says those funds should reach the size of 1.3 percent of a nation’s insured bank deposits and says the Brussels-based commission must approve any use. Today’s agreement says these funds won’t be allowed to contribute an amount more than 5 percent of a failing bank’s liabilities unless unsecured senior bondholders are wiped out.
Michel Barnier, the EU’s financial services chief, urged nations and the parliament to reach agreement on the deal by year-end. Today’s accord also paves the way for further plans from the European Commission to centralize handling of crisis-hit banks. Barnier will soon present proposals to create a single resolution system for euro-area banks, building on the rules discussed by ministers today.