Germany Says ‘Liability Cascade’ Must Prevail for Banks

Plans in the euro area to allow the direct recapitalization of failing banks must stick to a hierarchy of responsibility that starts with the banks’ shareholders, the German Finance Ministry said.

In its report for April, the ministry said a “liability cascade” must prevail in any attempt to save a bank, allowing the European Stability Mechanism to allocate resources on its main job of averting state insolvencies.

“From the German government’s point of view, it’s important to limit the volume for direct recapitalization to allow the ESM to focus on its core task,” the ministry in Berlin said today. “It’s also important that the liability hierarchy is followed,” it said, echoing comments made by Finance Minister Wolfgang Schaeuble in Brussels this month.

Citing legal concerns, Schaeuble rejected pressure from his euro-area peers to agree to rush to set up a centralized European banking resolution authority and fund to break the link between bank failures and state insolvency, saying that changes to the European Union’s treaty may be required.

Amid efforts to establish a banking union, it is the “uppermost priority” for Germany to press ahead with sealing an agreement on the EU’s bank restructuring and closure directive that includes so-called bail-in rules for bank investors, the ministry said.

The report also said March tax revenue at the federal and state level, minus municipal receipts, rose 5.7 percent compared with a year ago.

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