Euro-area finance chiefs will complete the rules for direct bank aid from the currency bloc’s backstop in March so the tool is ready when the European Central Bank concludes its assessment of lenders later this year, Dutch Finance Minister Jeroen Dijsselbloem said.
If a euro-zone government can’t deliver assistance to a bank that requests it, “then the ESM can step in with a banking program or direct recap of banks,” Dijsselbloem said today in Davos, Switzerland. “That instrument we will finalize in March, so that will also be available on strict conditions on the outcome of the asset-quality review” by the ECB.
A long-running debate over backstops has direct implications for the success of the ECB’s Comprehensive Assessment of the largest euro-zone lenders, which it will begin to supervise in November. German Finance Minister Wolfgang Schaeuble has warned that allowing the ESM to aid banks directly would require changes to German law.
“The stress test and the asset-quality review must be tough,” Federico Ghizzoni, chief executive officer of UniCredit SpA, said today on a panel with Dijsselbloem at the World Economic Forum. “And I agree that it would not be accepted by the markets unless we have evidence of some problems to be addressed.”
Lenders shown to have a capital shortfall in the ECB exam will be expected to seek funding on the markets first before turning to their national governments for assistance, Olli Rehn, the European Union economic and monetary affairs commissioner, said on the panel in Davos.
“And European banks have been doing that,” Rehn said. “In two years, 80 billion euros ($109 billion) have been raised of new bank capital.”
If national assistance if given, EU state-aid rules would apply, “so that equity share owners and junior debt holders would be bailed in,” Rehn said.
If a government can’t come up with the money, it can apply to the ESM for a Spain-style bailout, taking the debt on the state’s balance sheet and funneling aid to its banks. Finally, the ESM could extend assistance directly to troubled banks on “quite strict” conditions, Dijsselbloem said.
One condition would be that “deeper bail-in rules will be applied directly,” he said. “The rules that are part of the BRRD will be general practice as of 2016, but if before 2016 a bank would apply for direct recap, there would be a deep bail-in to be applied first,” he said, referring to a bill called the Bank Recovery and Resolution Directive.
The BRRD goes beyond current EU state-aid rules by placing senior unsecured creditors in the firing line. While the text of the bill has been agreed on by the European Parliament and EU member states, both must give their final approval before it can take effect.
Euro-area finance ministers agreed on the outlines of direct ESM bank aid last June, including a limit of 60 billion euros for the program.
Anshu Jain, co-CEO of Deutsche Bank AG, urged EU policy makers to accelerate their reform of the financial industry.
Speaking on the Davos panel, Jain said: “We understand the need for regulation; I will use this opportunity to ask for clarity and speed.”