Oct. 14 (Bloomberg) -- European Union finance ministers should decide if the euro area’s firewall fund could provide bridge financing for handling failing banks, according to a document prepared for finance ministers’ meetings in Luxembourg.
The European Stability Mechanism could offer guarantees or a loan to cover upfront costs of stabilizing a failing bank, according to the Oct. 10 paper, prepared by Lithuania, which holds the EU’s rotating presidency, and obtained by Bloomberg News. Any costs would be recouped over time from the banking sector. Depending on how talks proceed, the ESM’s treaties might need to be changed, according to the document.
Ministers should first consider whether they want to make permanent or temporary bridge financing available to nations or an EU-level fund that would be built up over time, according to the document. The EU should then consider whether the ESM could provide funding directly to bank resolution funds, and if so how to design a special purpose vehicle or other mechanism.
While designing a system to handle failing banks inside the euro zone, where the European Central Bank will take over bank supervision next year, EU ministers also should consider whether to make “fully comparable” support mechanisms for nations outside the currency bloc.
“If so, should possibilities/conditions be explored to extend euro-area support mechanisms to non-euro area SSM/SRM participants provided they contribute in due proportion to the financing of these arrangements?” the document states. It says talks continue on a European Commission proposal to add a bank recapitalization tool to the EU’s balance-of-payments fund, which has been used previously to provide aid to Latvia, Hungary and Romania.
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