Merkel Ally Says Euro States Must Handle Their Own Failing Banks

One of German Chancellor Angela Merkel’s senior lawmakers said euro-area governments should handle their failing banks without recourse to assistance from resolution funds in other countries.

European Union financial-services chief Michel Barnier has proposed a Single Resolution Mechanism for euro-zone lenders that involves a 55 billion-euro ($75 billion) common fund. Germany has led opposition to the plan.

Michael Meister, a deputy chairman of Merkel’s parliamentary group, said euro states should consider copying Germany’s model, which allows the national bank resolution fund to borrow from federal coffers when its own means are exhausted. If the government can’t help, it should apply for aid from the European Stability Mechanism, he said.

“I see no need for national restructuring funds to lend each other money,” Meister said in a Sept. 27 interview. “I’m rather of the opinion that we have agreed on a clear pecking order that begins with the owners of the banks, continues with the creditors and leads over to national liability funds.”

Meister’s comments suggest that all euro states should follow in the footsteps of Spain, whose government has borrowed slightly more than 41 billion euros from the ESM to recapitalize its banks. Spain qualified for as much as 100 billion euros of aid.

Legal Ground

Merkel’s government says Barnier’s resolution proposal must be overhauled because it’s on shaky legal ground and could endanger national control of budgets. In March, Germany began trying to build support behind an alternative blueprint for a “network of national resolution authorities” and backstop funds to deal with crisis-hit banks.

“Either a state is able to help its national fund, in which case we don’t need liability among the funds, or the state isn’t able to cope, in which case it already has the option to go to the ESM,” Meister said. “Either way, no liability among the funds is needed.”

Proposals to pool national resolution funds are also unrealistic because combined amounts are hardly sufficient to deal with major failing lenders, Meister said. Germany has a “low single-digit billion-euro amount” in its fund, he said.

The European Central Bank is scheduled to begin supervising lenders in the currency bloc as soon as October 2014, forcing the EU to grapple with who should decide when to close a bank and who will pay for it.

Commission Role

Earlier this month, Barnier defended the core of his Single Resolution Mechanism, which would also give the Brussels-based commission, the EU’s executive arm, the power to close banks.

“We have a problem with the idea that the European Commission should do this,” said Meister. “The commission is responsible for example for competition law in the internal market and for questions of financial assistance. Any form of restructuring is of course an intervention in the market. Those who intervene can’t at the same time assess the intervention.”

Barnier said the commission isn’t wedded to being chief decision-maker in the resolution system and would welcome a discussion on alternatives. The commission put itself forward for the role because of its reading of EU treaties, he said.

Before it's here, it's on the Bloomberg Terminal.