EU Unveils Bank-Crisis Plan With 55 Billion-Euro Fund

The European Union’s executive arm proposed procedures for handling failing banks with a 55 billion-euro ($70 billion) backstop, setting up a showdown with Germany over control of taxpayers’ cash.

Michel Barnier, the EU’s financial-services chief, unveiled the plan today for a single resolution mechanism that gives the European Commission in Brussels the power to decide when banks need to be saved or shut, potentially resulting in the use of public funds. Germany has warned this may violate the EU’s basic laws by usurping national control over finances.

The plan, intended to complement the European Central Bank’s oversight of euro-area lenders, includes a common resolution fund financed by levies on banks. The fund would be able to tap markets, backed by the assets of the banks it covers.

“We need a system that can deliver decisions quickly and efficiently, avoiding doubts about the impact on public finances, and with rules that create certainty in the market,” Barnier told reporters in the Belgian capital as he unveiled the proposal.

The 28-nation EU has been wrestling for more than a year with plans to build a banking union comprising ECB oversight, the single resolution mechanism and common rules for deposit guarantees. Five euro countries have sought international aid since Greece kicked off Europe’s debt crisis in 2009.

‘Public Money’

Barnier insisted that he has built safeguards into the plans to protect national governments from being railroaded into using taxpayer money. “The text states explicitly that the resolution board would not, in any scenario, be allowed to commit a member state’s public money without its agreement,” he said in an interview.

He expressed confidence that German concerns that the plan may not work under the EU’s treaties could be overcome. “The German legal point is linked in particular to the question of fiscal sovereignty, and we are going to solve it,” he said.

The commission and the ECB have urged rapid progress toward a centralized system to bolster confidence in the bloc’s banks and break the financial link between lenders and sovereigns. The project has received support from other euro nations, including France and Italy.

Germany renewed its opposition today, with government spokesman Steffen Seibert saying Barnier’s plan isn’t legally viable. The plan therefore threatens to delay the EU’s progress toward banking union, he said.

‘Vicious Circle’

As Germany argued for restricting the scope of the resolution mechanism, Governing Council member Ignazio Visco today reiterated the ECB’s call for a more ambitious approach.

Current plans “won’t break the vicious circle between the conditions of sovereign debtors and those of the banks and eliminate the national fragmentation of financial markets,” Visco, also governor of the Bank of Italy, said in Rome.

EU leaders last month reiterated their support for setting up the resolution mechanism as an integral part of a planned banking union, without specifying how it should work. At issue is how much authority the new European entity would possess, and what recourse national governments would have to dispute its decisions.

Under the commission’s plan, national governments could veto any resolution decision that includes possible recourse to the public purse, according to a summary of the proposals released by the commission today. The proposals, which target the euro area and other nations that sign their banks up for ECB supervision, require approval by governments and the European Parliament before taking effect.

Supervisory ‘Fragmentation’

The plan will address a “fragmentation” in bank oversight and an absence of effective decision-making processes that exacerbated tensions during the financial crisis, Barnier said, citing the dismemberment of Brussels-based Dexia SA as an example of authorities having to “improvise” a solution.

Germany has repeatedly urged the EU to embark on treaty changes to ease its path to banking union, arguing that the bloc’s current rulebook limits the powers that can be handed to central authorities. It has sought to build support behind an alternative blueprint for a network of national resolution authorities.

Under the commission’s plan, a bank resolution board, involving national regulators, would assess whether a bank’s finances have deteriorated to the point where intervention is needed, and if so make a recommendation to the commission to initiate resolution.

Bank Levies

The board would decide what action should be taken, such as creditor writedowns or asset transfers, and issue instructions to national regulators.

Over time, the joint bank resolution fund would replace national-level backstops, building up through levies on the banking industry, with individual banks’ contributions linked to the riskiness of their activities.

“In the first few years of course, the funding for it will be more modest,” Barnier said. “Our intention is that it should be able to borrow and draw upon alternative differentiated forms of funding on the markets.”

The common resolution mechanism is part of a package of measures on bank failure being put in place. The EU today said it will toughen its rules on state support for failing banks from Aug. 1, as it seeks to ensure that private creditors take a hit before taxpayers.

State Aid

The commission published updated bank state-aid guidelines requiring shareholders and junior creditors at a failing bank to face losses before any government funds are given. Rescued lenders would also have to apply a cap on total remuneration as long as they are under restructuring or relying on state support.

Also, finance ministers and European Parliament lawmakers began negotiations this month on a related EU law that sets out a rulebook for regulators on how interventions at failing banks, including creditor writedowns, should be undertaken. Those rules will begin taking effect in 2015.

The haggling is a far cry from 2008, when banks in the biggest European countries, as well as the U.S., required bailouts following the collapse of Lehman Brothers Holdings Inc.

In a single day, Oct. 13, 2008, France, Germany, Spain, the Netherlands and Austria committed 1.3 trillion euros ($1.7 trillion) to guarantee bank loans and take stakes in lenders.

The Dutch government still owns ABN Amro Group NV and only this year took over SNS Reaal NV. Germany established a 500 billion-euro fund to guarantee bank debt. Taxpayers extended aid to Commerzbank AG, Bayerische Landesbank, HSH Nordbank AG, Hypo Real Estate Holding AG, IKB Deutsche Industriebank AG and WestLB AG.