EU Bank-Failure Plan May Founder in Talks on Bill, Lawmaker Says

The European Union’s push to centralize the handling of failing euro-area banks may falter when lawmakers sit down to hammer out a final text of the bill next year, a key European Parliament negotiator said.

EU finance ministers agreed on a blueprint for the proposed Single Resolution Mechanism yesterday. The parliament approved its negotiating stance a day earlier. Now the work begins on a compromise that both must adopt before it becomes law. The differences in their approaches are fundamental, and time is short, as the assembly shuts down for elections in May.

“We are very aware that we need to seek a legal text on SRM before the end of this mandate,” Elisa Ferreira, who’s leading the parliament’s work on the bill, said by telephone. “But no agreement is a very serious possibility that’s on the table as well.”

The bank-failure plan, presented by EU financial-services chief Michel Barnier, is part of an effort to break the financial links between sovereigns and banks by centralizing oversight and crisis management of lenders. It includes a central authority to make decisions and a 55 billion-euro ($75 billion) industry-financed fund to cover the costs of saving or shuttering banks.

In order to overcome German objections to key parts of Barnier’s blueprint, ministers yesterday split it in two, taking some measures for setting up the fund outside the framework of EU law, with the intention of putting them into an agreement among the participating countries. They also rewrote the authority’s decision-making procedures, diminishing the role to be played by the European Commission, the EU’s executive arm, in favor of member states.

‘Strong Majority’

The ministers’ plan is a “completely different approach than the one the parliament approved by a very strong majority,” Ferreira said. An intergovernmental agreement “is for parliament a no-go,” she said.

“There is an extremely high risk of having political influence, or at least the perception of political influence on the destiny of a bank,” she said. A lender’s fate could depend on the “relative power of the member state where it is located.”

Ferreira and other parliament negotiators will meet with officials from Greece, which holds the rotating EU presidency in the first half of next year, to examine the way forward. She said the meeting may take place on Jan. 8.

“The negotiations will certainly be long, they will be difficult and they will be complicated,” EU Parliament President Martin Schulz told reporters today in Brussels.

‘Political Horse-Trading’

Christian Schulz, senior European economist at Berenberg Bank in London, said “weaknesses” can be found in the “small print” of the finance ministers’ plan.

“The decision process appears complicated and needs to be stress-tested,” he said. “Germany’s insistence on protecting its taxpayers’ money keeps national vetos in place, meaning that bank closures could become political horse-trading events.”

The ECB, which will work closely with the SRM in its supervisory role, has consistently pushed for a strong and independent central authority with a common resolution fund.

During yesterday’s meeting of finance ministers, ECB Vice President Vitor Constancio said markets will question the new agency’s credibility unless it has rapid-response capability and the power to borrow.

Today the central bank’s president, Mario Draghi, said the ECB “strongly welcomes” the ministers’ agreement and called for negotiations with parliament to begin immediately.

“This is everything we wanted to avoid with the banking union initiative, which was aimed at giving credibility to European banks and to cutting away banks from sovereigns where they are based,” Ferreira said.

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