ECB Sets Up Schaeuble Clash on Europe Plan for Banks

The European Central Bank set up a clash with German Finance Minister Wolfgang Schaeuble over how much to centralize the handling of failing lenders, a conflict that threatens to delay completing a banking union.

In an opinion published on its website today, the ECB called for the planned Single Resolution Mechanism to be based around “a strong and independent” authority with a central fund. That effectively rejects Schaeuble’s proposal to limit the project to a network of national bodies. The ECB also said that the SRM should cover all banks in the euro area and other participating nations.

A centralized approach “is better placed to guarantee optimal resolution action, including adequate burden-sharing, than a network of national resolution authorities,” the ECB said in its opinion. “Coordination between national resolution systems has not proved sufficient to achieve the most timely and cost-effective resolution decisions, particularly in a cross-border context.”

Governments are split over the SRM, part of a euro-area effort to break the financial links between sovereigns and banks, as officials race to meet a self-imposed deadline for agreement by the end of the year. Draft legislation presented in July by Michel Barnier, the European Union’s financial-services chief, met with complaints from some governments with Germany at the forefront. Finance ministers will seek to make progress when they meet in Brussels next week.

Market Sentiment

The opinion was approved in Frankfurt this week by the ECB’s 23-member Governing Council. After policy makers also cut the central bank’s benchmark interest rate to a record low to fight slowing inflation, ECB President Mario Draghi told reporters that “further decisive steps to establish a banking union will help to restore confidence in the financial system.”

“It is important for clarity and market sentiment that this gets sorted out as soon as possible,” Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland, said by e-mail. “The latest rate cut by the ECB shows how important the need to support growth is, and a smoothly functioning financial system is key for the supply of credit.”

Legal Doubt

Schaeuble said last month that the commission’s proposal must be overhauled because it’s on shaky legal ground and could endanger national control of budgets. Germany circulated an alternative blueprint earlier this year, involving a network of national authorities and no common fund.

A central fund is of “key importance for the SRM to be effective,” the ECB said. It should be financed “by ex-ante, risk-based contributions from all banks subject to the SRM, to be complemented by ex-post contributions where necessary.”

Splits among nations over the SRM include whether all or only some banks should be covered and whether the European Commission should be the key decision-maker, according to a document prepared by Lithuania, which holds the EU’s rotating presidency.

Germany and France clashed today over the commission’s role, with the German government saying the decision to put a bank into resolution should rest with the Council of the European Union, the EU institution that brings together representatives of the bloc’s national governments.

Opposing Stances

The formal decision to close a failing bank should be taken “not by the commission but the council” of the EU, German Deputy Finance Minister Thomas Steffen said at a conference in Berlin, adding that the commission would face a “conflict of interest” if it took on the role.

French Treasury chief Ramon Fernandez said at the same event that the decision on resolution could either be legally invested with the EU commission or with the council. “We think it would be more rational to be the commission,” he said.

Barnier told Bloomberg News in September that he was ready to discuss alternatives to the commission role, with the proviso that whichever system is finally agreed on must be effective and able to take rapid decisions.

Dutch Finance Minister Jeroen Dijsselbloem, who chairs meetings of euro-area finance chiefs, said yesterday that while the Netherlands prefers giving the responsibility to the commission, he would be prepared to discuss the German proposal.

Made Quickly

EU leaders said last month that governments should reach a joint position on the SRM plan by the end of this year, so enabling negotiations to start with the European Parliament on the final version of the law.

“My guess is that we will see some kind of compromise which will allow the EU to argue that everything is on track for a resolution mechanism but that this will have to be achieved in stages,” Reid said. “This will continue to be a very protracted process.”

While Schaeuble has billed his network proposal as a first step that could be followed by more ambitious moves once the EU has amended its treaties, the ECB stressed the need to set up a fully-fledged SRM swiftly. The project is a key counterpart to the ECB becoming a bank supervisor, a step which is scheduled to take place in November 2014, according to today’s opinion.

“Once the Single Supervisory Mechanism is operational and supervision is elevated to the European level, the same needs to happen for resolution,” the ECB said. The “SRM should be established by the time the ECB assumes full supervisory responsibilities.”

Other parts of the opinion call for the EU to advance the current start date for tougher rules on creditor losses at failing banks -- a position it shares with Germany -- and for adjustments to the planned method for calculating the required size of the central resolution fund. The ECB also calls for the SRM plan not to interfere with bank supervisors’ responsibility for assessing whether a bank is getting into financial difficulties.

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