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EU Mulls $68 Billion Fund to Aid Non-Euro Banks

European Commission in Brussels
The Brussels-based European Commission wants a resource that can operate alongside the euro area’s 500 billion-euro firewall, so that the entire 28-nation EU is braced for the results of next year’s stress tests, the officials said. Photographer: Jock Fistick/Bloomberg

The European Union is weighing whether a 50 billion-euro ($68 billion) rescue fund can be turned into a bank backstop for member states outside the single-currency bloc, two EU officials said.

The EU’s balance-of-payments fund currently has about 40 billion euros available, after being used to help Latvia, Hungary and Romania, the officials said. The European Commission 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, they said on condition of anonymity because the talks are private.

The Brussels-based commission wants a resource that can operate alongside the euro area’s 500 billion-euro firewall, so that the entire 28-nation EU is braced for the results of next year’s stress tests, the officials said. 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 by e-mail.

Stress Tests

“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, one of the officials said. This would include 60 billion euros in possible direct bank aid from the European Stability Mechanism and another 280 billion euros in capacity for banking assistance programs like the one Spain received last year, as well as the proposed tool for non-euro member states.

Unanimous Approval

Germany and the U.K. are leading opposition to the proposal, on the grounds that it might ease pressure on countries to clean up their banking sectors without aid, the officials said. 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.

The 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.

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