ECB Picks Fight With Germany on EU Plan for Failing Banks

The European Central Bank clashed with Germany over how the European Union will handle struggling banks and whether to create a common agency and fund to manage failures.

ECB Executive Board member Joerg Asmussen called for creating a central agency and an industry-funded common backstop for handling failing banks by “the summer of next year,” when the ECB takes up new supervisory duties. He set out the central bank’s position before EU finance chiefs met in Brussels today.

In a public debate during the meeting, Finance Minister Wolfgang Schaeuble held to Germany’s view that the EU shouldn’t try to create a single resolution agency without amending current treaties.

EU leaders began work on a banking union last year to break the cycle of contagion between nations and their banks that has plagued the euro area since the region’s financial crisis emerged in Greece in 2009. They started by giving the ECB oversight powers, and committed to accompany this with a single “mechanism” for handling bank failures.

The ministers today also signaled a growing willingness to give preference to depositors when assigning losses, putting senior bondholders and other unsecured creditors more squarely in the firing line. Germany and the Netherlands expressed concern that this move would increase bank funding costs.

‘Broad Consensus’

“If there would be a broad consensus for a compromise, we could compromise,” Schaeuble said. At the same time, he and Dutch Finance Minister Jeroen Dijsselbloem said they’d prefer to have no hierarchy among unsecured creditors.

Asmussen endorsed the emerging consensus on depositor preference as part of so-called bail-in rules. “The pecking order would first write down shareholders, subsequently bail in junior creditors, then senior unsecured creditors and only if necessary and as a last resort uninsured depositors,” he said.

Ministers sparred over the impact of the new writedown rules. Dijsselbloem expressed concern that banks’ funding costs would rise, while U.K. Chancellor of the Exchequer George Osborne said depositor preference could unfairly give shell companies priority over pension managers.

Spanish Economy Minister Luis de Guindos countered that retail accounts covered by EU guarantees, which protect deposits of as much as 100,000 euros, would suffer if uninsured depositors face losses whenever a bank runs into trouble.

‘Clear Message’

“With respect to the bail-in, we should try to send a very clear message that deposits will be properly protected,” Guindos said. “If banks suffer a run on deposits above 100,000 euros, the deposits below 100,000 euros will also suffer, so this is a bit artificial and we should try to concentrate on the proper protection of all the deposits.”

Nations outside the 17-nation euro area sought to protect their financial systems from strict rules under consideration for euro states, where common supervision will apply. Finance Minister Anders Borg said Sweden needs to keep the ability to inject equity capital into its banking sector, which is highly concentrated and faces systemic levels of foreign-exchange risks.

Osborne foreshadowed further debates on the bank-failure rules by calling for changes to planned requirements for national bank resolution funds. He said it would be “totally useless” for the U.K. to set up a fund in advance and endorsed his nation’s current system of absorbing costs after the fact.

Single Pool

While EU nations managed to overcome German treaty concerns about common supervision for the euro area, Schaeuble has taken a tougher line on the bank-resolution arm of the project. Schaeuble said last week that money to pay for winding down troubled banks won’t come from a single pool until decision-making powers in the bloc are more centralized.

A network of national resolution authorities and backstops could form a first stage of the project, until treaty changes and further EU integration in other areas of policymaking are completed, he said.

Nations are split over whether some freedom should be left to national regulators to grant ad hoc exemptions from writedowns to some unsecured bank creditors, including uninsured depositors.

“There will be some exclusions in any resolution,” Irish Finance Minister Michael Noonan said.

‘Wealthy Member States’

While the U.K. and France have advocated a so-called discretionary approach, arguing that it’s the only way to make bail-ins work in practice, some other governments, and the European Commission, have warned that this threatens to hand wealthier EU nations an advantage in attracting savers.

“We need to have a system that is clear,” Olivier Guersent, head of cabinet for Michel Barnier, the EU’s financial services chief, said last week.

A system with lots of flexibility would mean that “wealthy member states could exclude a lot of things, but not-so-wealthy member states will not be able to afford” to do the same, he said. “There you will create a very unlevel playing field. Guess where depositors will prefer to put their money. Where they are likely to be excluded or where they are likely to be included.”

Finance ministers will tackle the bank resolution rules again in June, with an eye toward agreeing on a negotiating position for discussions with the European Parliament.

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