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EU Reaches Deal on Bank-Failure Bill After Marathon Talks

Dutch Finance Minister Jeroen Dijsselbloem
Dutch Finance Minister Jeroen Dijsselbloem shepherded the debate through the night, stepping out of negotiations periodically to phone his euro-area counterparts. Photographer: Jasper Juinen/Bloomberg

European Union lawmakers struck a deal on legislation to create a single agency to handle failing euro-area banks after an all-night negotiating marathon ahead of a summit of EU leaders starting today in Brussels.

German Finance Minister Wolfgang Schaeuble was drawn into the talks around 5:30 a.m as the discussion pressed on and negotiators reached out to nations that had taken the hardest line against speeding up decision-making and funding for the proposed Single Resolution Mechanism. Lawmakers emerged around 7:15 a.m. with a deal, which now will need formal approval by the European Parliament and by national governments.

“It’s a very good agreement,” European Central Bank President Mario Draghi said today before a meeting of EU leaders in the Belgian capital. He hailed the compromise plan as “great progress for a better banking union. Two pillars are now in place.”

The SRM is part of an EU effort to prevent future financial crises by pooling responsibility for euro-area banks, a project known as banking union. In a first step, the ECB will fully assume supervision of the 18-nation currency bloc’s lenders in November.

Schaeuble welcomed the agreement, which he said addresses legal questions that had held up the negotiating process. “Our goal was a sensible decision-making mechanism with effective control of the resources and a minimization of risks to taxpayers,” he said in a statement. “This is now possible on a legally secure basis.”

Bank-Sovereign Link

The deal is a signature achievement for European heads of government meeting in Brussels today. The leaders have been working for nearly two years to repair the currency bloc’s financial architecture and guard against further crises sparked by contagion between banks and sovereign borrowers.

Today’s agreement retains key elements of a plan put forward last year by Michel Barnier, the EU’s financial services chief, including the creation of a central resolution board backed by a 55 billion-euro ($77 billion) fund financed by industry levies. The deal also allows the EU to meet a self-set deadline of concluding talks in time to conclude work on the law ahead of EU elections in May.

EU President Herman Van Rompuy said today’s deal on bank resolution is a “crucial step” to overcome the euro area’s financial crisis. Today’s agreement frees him to focus on Ukraine and energy policy during the two-day summit in Brussels.

Transition Period

Euro-area banks will fill the new agency’s companion fund over eight years under the agreement struck after 16 hours of talks. Funds will stay in national compartments during that transition period. After three years, about 70 percent of the fund will be available to all participating nations, and the remainder of the funds will be pooled over the remaining phase-in years.

Nations and the parliament agreed to streamline the process for making decisions when a bank is failing. Draghi said the improvements will make the SRM “swifter and more operational.”

Lawmakers also agreed that “a credit line shall be established” and should be accessible as it stands behind the bank-fee fund, said Elisa Ferreira, a Portuguese Socialist who has been steering the measure through the 28-nation EU Parliament.

Draghi said the compromise contains “a clear reference to enhanced borrowing capacity from the market by the fund. We’ll have to clearly see in detail what this means.”

All-Night Talks

Dutch Finance Minister Jeroen Dijsselbloem, who represented euro-area nations in the banking talks, shepherded the debate through the night, stepping out of negotiations periodically to phone his euro-area counterparts. At one point, talks were on hold for more than an hour to wait for a response from Schaeuble and other ministers, said Sven Giegold, a German lawmaker representing the assembly’s Green group in the talks.

“All parties involved did their utmost to deliver results on time,” the Dutchman said in a statement in his role as Eurogroup president.

Details will need to be studied, said Dijsselbloem, whose party lost more than 5 percentage points of popular support and gathered 10 percent of votes in the Netherlands’ elections yesterday. The Dutch Labor party lost political dominance in Amsterdam for the first time since World War II.

Today’s bank-resolution accord broke a deadlock that had shown few signs of budging since December, when the parliament and finance ministers proposed competing visions of the bank resolution law. ECB Executive Board member Yves Mersch said last week that not having the SRM “would be very close to suicide.”

Further Talks

Nations “really wanted a deal,” said Corien Wortmann-Kool, an EU parliament member from the Netherlands.

Today’s deal on the SRM sets out a blueprint for the overall system. Further talks will be needed in the months ahead on implementing measures to flesh out some aspects, including on the methods to be used for calculating banks’ individual contributions to the central fund.

“Europe gets it,” Christian Schulz, economist at Berenberg Bank in Frankfurt, wrote in a note to clients today that described the deal as a limited step forward. “The euro zone is bolstering its defenses against future crises.”

The faster timetable agreed in the talks should be handled carefully so that European resources aren’t on the hook to deal with “legacy assets” that ran into trouble under national supervision, said Michael Kemmer, general manager of the Association of German Banks.

‘Big Step’

Overall, the resolution deal “is a big step toward more financial stability in Europe,” Kemmer said in a statement. “The safety net of the banking union can now be spread simultaneously with the start of the single supervisory mechanism” at the ECB later this year.

The marathon talks were described by Sharon Bowles, chairwoman of the parliament’s Economic and Monetary Affairs Committee, as the longest ever on an EU financial-services law.

For the ECB, the SRM is an “indispensable” companion for the euro-area bank supervisor, said Sabine Lautenschlaeger, vice chair of the central bank’s Supervisory Board.

“It has to be on the same level,” she said today in Dusseldorf, Germany. “You can’t supervise at a European level and then resolve at the national level. It is a big step forward.”

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