EU Weighs Reining in Proposed Board for Handling Bank Failures

The European Union may scale back the powers of a planned central board for handling failing euro-area banks in a bid to assuage concerns that the current blueprint would rob governments of control over their budgets.

EU financial-services chief Michel Barnier has proposed a Single Resolution Mechanism for handling euro-area bank failures, part of the bloc’s three-pronged effort to create a banking union. Under his plan, the European Commission would decide when action is needed at a failing bank, while the board would make preparatory and operational decisions on how regulators should intervene.

Officials from the 28 EU member states are weighing a range of options for tackling the potential threat to fiscal sovereignty, including narrowing the SRM board’s mandate and transferring key decision-making responsibilities to finance ministers, according to a document obtained by Bloomberg News. Another option involves handing states a veto over some of the board’s decisions, according to the document drafted by Lithuania, which holds the rotating EU presidency.

“Many member states have raised concerns regarding the need to ensure budgetary sovereignty in the context of the SRM proposal,” according to the document, which was discussed by national diplomats in Brussels yesterday. Lithuania laid out five options for bolstering “budgetary safeguards.”

Barnier’s Blueprint

The resolution plan is part of a bid by the euro area to break financial links between sovereigns and banks by centralizing oversight and crisis management of failing lenders. Barnier’s blueprint met a German-led attack at a meeting last month of EU finance ministers.

German Finance Minister Wolfgang Schaeuble said the commission’s proposal must be overhauled because it’s on shaky legal ground and could endanger national control of budgets. EU lawyers also have warned that Barnier’s text contains insufficient budget safeguards.

Barnier’s plan requires approval by a weighted majority of national governments and by the European Parliament before it can take effect.

One option proposed by Lithuania would be to allow the board to make decisions on private-creditor losses, while tapping public backstops, including a common bank-financed fund, would be made by ministers.

Deposit Guarantees

Another alternative would be to bring forward to 2015 from 2018 the planned start date of related EU rules requiring a stricken bank’s unsecured senior creditors to face writedowns before recourse is made to the taxpayers. The entry into force of these rules, contained in the Bank Recovery and Resolution Directive, are being negotiated by governments and the EU parliament.

Nations are also weighing how far the board should be able to make decisions that might affect national bank deposit-guarantee schemes, according to the document.

“In the event of a systemic crisis, it is highly possible that DGS funds will quickly be depleted, and this would trigger the need to replenish the DGS from public finances of affected member states,” the document states.

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