Euro Banks in Dark on Payment Rules for Resolution Fund

Euro-area banks face uncertainty over how much they’ll have to pay into a planned 55 billion-euro ($76 billion) fund for saving or shuttering lenders as lawmakers wrangle over the rules for contributions.

The industry-financed fund is a key part of plans to build a Single Resolution Mechanism for handling failing euro-area banks. European Union member states are tussling with the European Parliament and among themselves over how money should be paid in.

“It all seems to be getting far too complicated,” Sharon Bowles, chairwoman of the parliament’s Economic and Monetary Affairs Committee, said by e-mail. Some ideas being discussed by governments could “end up penalizing or advantaging some bank models and therefore countries,” leading to political clashes between nations, she said.

The SRM is part of an EU effort to prevent future financial crises by pooling responsibility for banks. The legislation to establish it must be approved by national governments and the European Parliament to take effect. A race is on to have the law on the books before the assembly adjourns for elections in May.

Negotiators for the parliament and officials from Greece, which holds the rotating EU presidency and represents member states, resume talks on the SRM tomorrow. EU ambassadors meet to review progress on the bill the following day.

Covered Deposits

Under draft plans for the SRM, the common fund would be tapped to ensure failing banks can be broken up or restructured in an orderly way. The 55 billion-euro target is equivalent to 1 percent of state-guaranteed deposits at euro-area banks. This level would be reached over a period of as much as 10 years.

One issue that has vexed talks between member states and parliament on a final version of the SRM bill is how to calculate the size of a bank’s payments to the single fund.

In the blueprint proposed by EU finance ministers in December, one part of a bank’s contribution would be calculated based on the size of its liabilities, excluding state-guaranteed deposits and capital, and a second part on its risk profile.

This method of having “basically two pots, one risk-weighted and one not,” is at odds with the parliament’s position, said Sven Giegold, the lawmaker leading work on the SRM rules for the assembly’s Green group. The parliament based its approach to this issue on a related bill, the Bank Recovery and Resolution Directive, which sets EU-wide rules for how nations handle failing lenders.

‘Sustainable Banks’

The BRRD foresees a single formula for calculating a bank’s levy based on the size of its liabilities, adjusted for the riskiness of its investments, Giegold said. The parliament and member states agreed on the BRRD last year, though it awaits final approval.

The parliament opposes any bank levy that ignores risk, Giegold said, because lenders that take big risks should pay more. “I don’t like sustainable banks being put at a disadvantage,” he said.

Among themselves, EU states are struggling to come up with a formula for calculating risk for setting fund contributions, and have asked the European Commission, the EU’s executive arm, to come forward with proposals for doing this.

If the SRM bill becomes law, banks would probably have to wait for the EU to adopt technical rules on the calculations before they’d know how big their contributions would be.

‘Conceptual Flaw’

And even a point accepted by both the parliament and member states -- linking the size of the resolution fund to total covered deposits -- has raised questions among the banks that will be compelled to pay when the fund is operational.

“It does not seem logical that a bank’s contribution is based on its wholesale liabilities, while the overall size of the fund will be determined by total covered deposits,” Koos Timmermans, vice chair of ING Groep NV’s banking arm, said on Feb. 20. “This is a conceptual flaw and creates asymmetries. If the size of wholesale liabilities is the criterion, you run the risk it impacts debt issuance, which in turn could impact interbank markets, which we should try to avoid.”