Draghi Says Bank Resolution Plan May Be Too Cumbersome

European Central Bank President Mario Draghi criticized plans by euro-area governments on how to deal with failing banks, saying current proposals might be too complicated to work properly.

“I am concerned that decision-making may become overly complex and financing arrangements may not be adequate,” Draghi said during a hearing at the European Parliament in Brussels yesterday. “We should not create a Single Resolution Mechanism that is single in name only.”

Euro-area national representatives are meeting in Brussels this week to try to inch forward to a compromise on a bank resolution mechanism for the region to mitigate future financial crises and repair cracks in the single currency’s architecture. Germany has led resistance to common financing for the costs of managing a bank failure, pushing instead for a network of national funds that leaves each country responsible for its own institutions.

“I urge you and the Council to swiftly set up a robust Single Resolution Mechanism, for which three elements are essential in practice: a single system, a single authority, and a single fund,” Draghi said.

Under a plan circulated among national representatives in Brussels, which differs from the European Commission’s original proposal, most powers would fall to a board made up of national governments and executive staff.

‘Instant’ Decisions

That SRM agency would be based on existing European Union law. The fund to wind down banks, however, would be put together in part through an intergovernmental agreement among participating nations, who would need to agree unanimously to proceed.

Draghi said any future resolution body would have to make decisions about how to deal with a failing bank “in an instant” after the lender had been declared not fit to continue business by the ECB.

“One can’t have hundreds of people consulting each other about whether a certain bank is viable,” Draghi said, adding that a complex process of national consultation when a bank needs resolution would be legally “very messy.”

“Whatever mechanism is being put in place, it should work,” he said.

The ECB is currently preparing to take over bank supervision as the first pillar of a prospective financial union in the euro area. Before it starts in November 2014, the ECB is conducting a review of bank assets.

Draghi said if capital shortfalls are discovered in that process, banks shouldn’t wait until results are announced in October next year before taking action.

“If corrective action has to be undertaken, especially in the case of publicly listed companies, this will have to be done immediately because markets have to be informed,” he said.

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