Schaeuble Counters Push to Speed Common Euro Bank-Failure Fund

Germany's Finance Minister Wolfgang Schaeuble
Germany's finance minister Wolfgang Schaeuble reiterated his insistence that speeding up the pooling of the SRM fund’s resources would require forcing banks to accelerate payments into the fund, as pooling and pay-in must move together. Photographer: Jason Alden/Bloomberg

Wolfgang Schaeuble, Germany’s finance minister, blocked efforts by his European counterparts to speed the move to a common resolution fund as they rush to create a system for handling failing euro-area banks.

In talks today on how to break a deadlock with the European Parliament on the Single Resolution Mechanism bill, Dutch Finance Minister Jeroen Dijsselbloem proposed allowing the SRM fund to sell debt guaranteed by euro states during its 10-year build-up period. This would fill the fund to its 55 billion-euro ($75 billion) capacity quickly and ease the contentious issue of how quickly to pool money for covering the cost of saving or shuttering banks, he said.

Schaeuble shot this idea down immediately after the meeting in Brussels. “If we mutualize and then we set up a lending capacity and then we agree to joint liability, and then the bill and the risk remains with the taxpayer, this is exactly what we’re not going to do,” he told reporters.

European Union finance chiefs gathered in the Belgian capital to identify areas where they could compromise with parliament on a final SRM bill, with the goal of getting the law on the books before the assembly adjourns for May elections.

Yet sharp divides emerged on how to decide when a bank is failing, the role of public backstops and how the bank-financed fund should operate, including how long to preserve national compartments that limit access to the fund during its first decade.

Compromise Text

The bank-failure legislation is the next phase of the EU’s banking union project, which begins when the European Central Bank becomes the euro area’s single supervisor in November. Finance ministers and the parliament set forth their competing versions of the bill late last year. Talks on a compromise text have so far proven fruitless.

Today’s talks may give more room to Greece, which holds the EU’s rotating presidency, to maneuver in talks with parliament negotiators that resume tomorrow.

Ministers last year set out a system of national compartments for bank contributions to the single fund. Such barriers would be phased out over 10 years, resulting in a common pool when the fund is at full strength.

The ECB says that a unified defense is essential to stave off future financial crises, and has urged a faster move to joint resources. Germany has consistently opposed moves to accelerate making cross-border money available in an emergency.

‘Credible Backstop’

At today’s meeting, ministers warned that markets may continue to flare unless they receive a strong signal that the system is strong enough to withstand emergencies. They remained divided on the issue of a public backstop to stand behind the resolution fund.

“The financial system, as the political system, depends on credibility,” said Portuguese Finance Minister Maria Luis Albuquerque. “Having a credible backstop to support the whole resolution fund is of critical importance. If we set up an elaborate mechanism that doesn’t have a credible backstop, then all of the principles that we have been highlighting as very relevant may become irrelevant.”

ECB Vice President Vitor Constancio said that bank supervisors need a practical system for handling banks that are too weak to survive. If the EU designs a resolution mechanism that can’t operate quickly in an emergency or doesn’t have access to necessary resources, supervisors might hesitate to act as needed, he said.

‘Risk Profile’

Ministers from small countries argued against any changes that would put their banks or national finances at a disadvantage to larger counterparts within the banking union. It’s important that “contributions are calculated on a European basis so that two banks with the same balance sheet and risk profile pay the same contributions irrespective of the member state where they are established,” said Belgian Finance Minister Koen Geens.

Options explored today included speeding up the pooling of the SRM fund’s resources, a proposal supported by the ECB. Schaeuble reiterated his insistence that this would require forcing banks to accelerate payments into the fund, as pooling and pay-in must move together.

The EU embarked on its banking union project to break the link between troubled banks and struggling sovereign borrowers that fueled the euro area’s debt crisis. The ECB’s oversight powers will combine with new rules for when regulators can force losses on bank creditors in a bid to prevent bailout costs from overwhelming nations that use the common currency.

SRM Credibility

Irish Finance Minister Michael Noonan made the case for a backstop to underpin the bank-failure fund given its limited capacity, saying markets need a sign that a plan’s in place.

“When you think of European banks having multi-trillions of assets on their balance sheets, the fund itself is quite small,” Noonan said. “Maybe if we could bring forward the date of consideration of the backstop, or if we had an agreement that a backstop would be in place by a certain date, that might help the credibility of the system.”

Dijsselbloem said his plan for the resolution fund is “not a public backstop” and Schaeuble insisted such a shock absorber is a question for the future. He said ministers agreed in December to postpone consideration of the issue and it would be counterproductive to reopen it now.

“We agreed, and I would like to remind us, it makes no sense to start now discussions on a possible common backstop,” Schaeuble said.

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