EU Resumes Battle Over Imposing Losses at Failing Lenders

European Union finance ministers struggled for consensus as they took up an Irish-drafted compromise proposal for assigning losses at failing banks, extending a deadlock that doomed talks last week.

The bloc’s 27 finance chiefs remained “quite far away” from agreement as they convened for the emergency talks in Brussels at about 6 p.m. yesterday, Sweden’s Anders Borg told reporters. Ireland’s Michael Noonan, chairing the meeting, held preliminary talks earlier to get a deal he says is key for keeping EU crisis-fighting on track.

“We can and even must reach an agreement,” French Finance Minister Pierre Moscovici said. It’s “indispensable” for France and Germany to “advance together to find a solution.”

Talks last week foundered on the question of which creditors face writedowns when banks fail. Some countries, such as France and Sweden, demanded more flexibility for national authorities. Others, such as Germany, sought strict rules across all 27 EU nations. On the table were ways to set thresholds for losses that would need to be assigned before national discretion would be allowed.

An updated plan, circulated by Ireland, a week away from the end of its six-month rotating EU presidency, would hand regulators different degrees of flexibility depending on how they plug gaps that arise when some creditors are exempted from writedowns.

‘Liability Cascade’

“We need a clear liability cascade: first the shareholders, then the various bondholders, then the depositors -- not the insured deposits, which have always been excluded by European law -- then the member state concerned, and if that member state can’t do it, then also the European rescue fund,” German Finance Minister Wolfgang Schaeuble said yesterday.

“What we saw in 2008, that the big ones make billions in profit and the community of taxpayers bears the losses; that’s something we no longer want to have,” Schaeuble said.

Under the revised Irish plan, regulators would have more freedom to grant carve-outs from writedowns if the burden is shifted to other private creditors, rather than to national resolution funds.

Flexibility could be applied in cases where writedowns could threaten financial stability, or cause “value destruction that would leave other creditors worse off,” according to the proposal, obtained by Bloomberg News.

Schaeuble declined to comment upon arriving. Moscovici defended “limited flexibility” for national authorities, calling his stance “reasonable.”

Levies on Banks

Nations would have to work within certain limits if they chose to tap resolution funds to make up the shortfalls caused by exempting some private creditors.

These funds, financed by levies on the banks, couldn’t be used until 8 percent of the distressed bank’s liabilities had been wiped out, according to the document. Limits would also be placed on how much support these funds could provide.

The plan also stipulates that nations can use public money, including potentially the European Stability Mechanism, to plug gaps caused by creditor exemptions if the limits on the use of resolution funds have been reached.

The EU needs an approach “that allows some but limited flexibility to ensure financial stability, while still providing an ex-ante pecking order and clear rules,” Joerg Asmussen, a member of the European Central Bank’s executive board, said in a speech today in Paris.

“Global investors need certainty about the rules of the game in Europe,” he said.

Cycle of Contagion

After more than three years of crisis and bailouts in five euro-area nations, EU leaders have pursued the banking union as a way to reassure investors that they can break the cycle of contagion between banks and sovereign debt. The ECB will take over bank oversight in the euro zone next year, and the strategy calls for bank resolution procedures to be in place along with national backstops.

Leaders gathering in Brussels later today may downplay the pace of banking reforms. Draft conclusions for the summit affirm that “it is imperative to break the vicious circle between banks and sovereigns,” without setting deadlines for further action.

“This is a tough negotiating chapter,” German Chancellor Angela Merkel said on June 24. Europe’s priority should be to “become more competitive,” not just increase its oversight of banks, she said.

Financial Stability

Denmark, one of the few European nations that has allowed some of its banks to fail, wants strict rules in all 27 countries.

Sweden’s Borg countered that nations, especially those outside the euro zone, need to be able to step in when financial stability concerns become paramount.

“I think you should earn flexibility,” he said. “If you have stronger banks and more money in buffers, then you should have more flexibility. And also I think we should be able to take over banks.”

“If we put all the eggs in bail-in, this might be a very costly solution for Europe,” he said.

(For more on Europe’s debt crisis, see TOP CRIS.)
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