Euro-Area Bank-Failure Bill Deadlocked on Plans for Common Fund

Talks on a euro-area bank-failure authority are deadlocked as negotiators struggle to find common ground on a fund to cover the costs of saving or shuttering lenders, an internal European Union document shows.

“There was no movement from the starting positions by either of the institutions and no agreement was reached on any of the issues of substance,” according to the document, which summarizes Jan. 8 talks between the European Parliament and officials from Greece, which holds the EU’s rotating presidency.

The parliament favors a strong centralized authority backed by a common fund filled by levies on banks, similar to EU financial-services chief Michel Barnier’s initial proposal in July. EU member states, represented in talks on the legislation by Greece, want to move ahead with a tiered system that finance ministers sketched out in December.

The EU is racing to finish work on the Single Resolution Mechanism before May, when the parliament stops work for elections. Resolution, the process of restructuring or shutting down a failing bank, has taken center stage, with the European Central Bank set to assume oversight of euro-area banks in November. The goal is to assure financial markets that the EU can take action when its biggest banks teeter.

Negotiators will return to the table on Jan. 15 in Strasbourg as they search for a compromise, followed by talks in Brussels on Jan. 29, according to the Jan. 13 document, drawn up by Greece and obtained by Bloomberg News.

National Compartments

“All sides are taking negotiations very seriously and everyone is aware that we need to reach an agreement within the set deadlines,” said Chantal Hughes, a spokeswoman for Barnier.

Finance ministers agreed in December on a plan to create the new agency under EU law while arranging financing for the fund with an intergovernmental accord among participating countries, cutting the parliament out of decisions. In the ministers’ plan, the fund would be divided during a 10-year build-up period into national compartments that would gradually dissolve.

The European Parliament “expressed doubts” that the plan “is efficient and breaks the links between banks and sovereigns,” the chief goal of the banking union, according to the document. Parliament negotiators have taken part in the talks, while expressing concerns that the dual-track process would undermine EU commitments to build a common system.

The parliament and member states agree that the resolution agency should begin work on Jan. 1, 2015, with a 2016 start for new rules on when private investors should take losses. Yet member states say the entire SRM project hinges on the success of the intergovernmental pact for the single resolution fund, according to a summary of differences among negotiators.

Credit Line

Parliament wants the new system to include explicit procedures for accessing cash quickly, according to the summary posted on the website of lawmaker Sven Giegold. “A credit line should be set to ensure to the fund immediate availability of adequate financial means.”

Nations are still wrestling with how to provide bridge financing to the new system. The current plan says countries that need resources to handle bank failures will need to turn primarily to the compartments of affected countries, with only limited abilities to tap the broader fund.

One possibility, as laid out in a Jan. 8 draft of the text, would allow “voluntary borrowing and lending transactions” among the national compartments. The draft also lays out a detailed system for which compartments would automatically be tapped when, and it leaves open the question of how long countries would have to ask surviving banks for after-the-fact contributions to replenish the funds after they’re used.

Public Backstops

ECB President Mario Draghi said last week that governments are “basically committed” to provide public backstops in an emergency. These pledges go hand in hand with new rules on state aid to banks and on forcing junior creditors to take losses, he said at a Jan. 9 press conference in Frankfurt.

“What leads you to think that there aren’t such backstops in place?” Draghi said when asked if backstops would be sufficient for short-term needs and also long-term financial stability. “On this, I think there is an explicit commitment that I frankly have no reason to doubt.”

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