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EU Leaders Pledge to Reach Euro Bank-Failure Agreement This Year

European Union leaders in Brussels
European Union leaders pose for a family photo at the European Council summit in Brussels. Photographer: John Thys/AFP/Getty Images

European Union leaders recommitted to seek a joint strategy this year for how to handle failing banks in order to prepare the euro zone for European Central Bank financial oversight.

The leaders last year sought to break the link between struggling banks and the euro zone’s sovereign-debt crisis by handing the ECB supervisory powers, the first step toward a broader banking union. The European Commission followed up by proposing a Single Resolution Mechanism for failing lenders.

Nations must decide how to safeguard struggling banks so that ECB reviews of the euro zone’s most important lenders, which begin next month, don’t spook investors. ECB President Mario Draghi, who addressed the summit over dinner, warned this week that “banks do need to fail” to prove the assessments’ credibility.

“The next crucial step for the banking union will be the Single Resolution Mechanism, because once supervision is European, we cannot leave failures to the national level,” EU President Herman Van Rompuy told reporters today, midway through a two-day summit in Brussels. “Member states have committed to reach a political agreement on the commission proposal by the end of the year so that it can be adopted before the end of the parliamentary term.”

Italian Prime Minister Enrico Letta told reporters that “another small step forward” had been made at the summit. “In December the European Council will have to discuss in a much stronger way, because it’s a point on which we don’t want to even minimally retreat.”

Three-Stage Probe

Leaders are scheduled to convene again in Brussels on Dec. 19-20.

“What happened tonight was a confirmation and an engagement. Banking union is now irreversible,” French President Francois Hollande said.

The ECB is running a three-stage probe into the health of the euro-area banking industry that will examine about 130 banks, using a benchmark capital-to-assets requirement of 8 percent. A series of stress tests, which pit the banks’ balance sheets against a range of adverse scenarios, will be conducted with the European Banking Authority as the final step in that process.

Dutch Prime Minister Mark Rutte underscored the urgency of the issue, saying he’s not convinced every euro member will have sufficient backstops in place to handle any capital shortfalls the ECB assessments uncover.

‘All Necessary Means’

“Countries should use all necessary means to prepare their national systems, so if serious issues come out of the bank reviews they can be addressed,” Rutte told reporters before the summit began. The Netherlands is ready, “but that’s not the case with all my European colleagues,” he said.

Once the new oversight regime is in place and “effective,” countries may be able to ask the European Stability Mechanism, the euro firewall fund, to help lenders directly. For now, those resources remain walled off.

Van Rompuy said the ECB reviews are “a very important exercise, for which governments must plan well in time with coordinated and appropriate arrangements, including national backstops.”

Finnish Prime Minister Jyrki Katainen said countries will need to put their own houses in order rather than look to the ESM. Plans to allow direct bank aid from the fund remain on hold as the ECB prepares its reviews.

Parliament Position

“We have decided that all the countries should put their own national backstops in place and we have wanted to underline that it is the private sector’s responsibility to solve their own problems,” Katainen said.

The European Parliament supports the commission’s proposal to create a Single Resolution Mechanism and a central fund to help handle struggling banks, said the legislature’s president, Martin Schulz. Lawmakers are prepared to work to reach agreement with nations “in the coming months,” he said.

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