Dijsselbloem Offers Plan for Limited Direct Euro Bank Aid

The European Stability Mechanism could provide direct aid to banks in a limited set of circumstances, and only if countries can’t afford to take bank support on to their own balance sheets, according to a new proposal from Dutch Finance Minister Jeroen Dijsselbloem.

The ESM’s direct bank recapitalization tool has been in the works for nearly two years as part of the effort to prevent another debt crisis flare-up. Under Dijsselbloem’s plan, the tool couldn’t be used “as a precautionary instrument” or in cases where a country could afford to pursue an indirect bank aid program such as the one used by Spain.

“The ESM can provide through its normal procedures indirect recapitalization of financial institutions in the form of a loan to a member state, after appropriate bail-in” of private-sector creditors, according to the May 5 plan, a copy of which was obtained by Bloomberg News.

“As far as indirect recapitalization is not possible, the instrument of direct recapitalization could be used in line with agreed procedures” once the European Central Bank takes on full supervision of euro-area banks, the plan states.

Dijsselbloem’s proposal focuses on how the bank aid tool could be usable in 2015, which is a transitional year in the euro area’s move toward banking union. The Dutchman, who leads the currency bloc’s finance ministers’ group, told reporters yesterday that a deal could be reached by June.

‘Good Progress’

“We made very good progress,” Dijsselbloem said. The plan “will allow ministers to seek, where necessary, a parliamentary mandate in view of a political decision which we can then take before our next regular meeting of June 19,” he told reporters.

Direct bank aid has been a key element of a long-running debate over backstops, which has direct implications for the success of the ECB’s Comprehensive Assessment of 128 lenders that it will begin to supervise fully in November. German Finance Minister Wolfgang Schaeuble last year warned that allowing the ESM to aid banks directly would require changes to German law.

The new plan includes several reviews of the direct bank aid tool. “On top of the biennial review of the instrument already foreseen, a more comprehensive review will take place after 10 years where a decision will be taken on the continuation of the instrument,” the plan says.

Dijsselbloem told reporters that the planned guidelines will be most important during the year before the start of new EU rules in 2016 on how to assign losses to creditors at failing banks.

“My proposal on direct recap foresees that in 2015 a bail-in of 8 percent of total liabilities and the use of national resolution funds up to the 2015 target level will be preconditions to use direct recap,” Dijsselbloem said.

A country would need to apply for an ESM aid program on behalf of its banks and would need to pay a 75-basis-point fee, according to Dijsselbloem’s proposal. When the program ends, participating nations could be reimbursed up to 45 basis points of the program fees, if the ESM made any profit, the plan says.

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