EU Weighs Scaled-Back Resolution Levies for Small BanksJim Brunsden and Birgit Jennen
The European Union is considering preferential treatment for smaller banks when it comes to the levies they pay into resolution funds.
The European Commission is weighing plans for how to calculate banks’ contributions to a 55 billion-euro ($74 billion) fund that the euro area will start building up in 2016, as well as rules for national funds in other EU nations.
While larger banks’ levies will probably be based on their size, funding model and risk levels, smaller lenders may benefit from a “simplified treatment” designed to stop their contributions and compliance costs getting too large, according to a commission document obtained by Bloomberg News.
In this system, “all banks should contribute to the fund, but very small banks would be charged a flat fee based only on their total liabilities minus own funds and covered deposits,” according to the document, which was prepared for a meeting tomorrow of national experts. Finance ministers will discuss the rules at a June 20 meeting in Luxembourg.
German Finance Minister Wolfgang Schaeuble has been lobbying for his country’s smaller lenders to be exempted entirely from paying into the Single Resolution Mechanism’s common fund, siding with the nation’s savings banks, Germany’s biggest source of credit.
EU law is clear that an out-and-out exemption is impossible, the document states. Still, nations are split on the matter, with some arguing that “very small banks are unlikely to benefit from the resolution funds,” according to the document.
“The question is how to find a proportionate and right balance between the amount of contributions that small banks should pay to the resolution funds, and the related administrative burden deriving for those banks,” the document states. “Calculating a (complex) flat or risk-based part of the contribution formula could be very costly and burdensome for very small banks.”
The simplified treatment could be withdrawn if a small bank was deemed particularly risky, according to the document.
Germany’s Social Democratic Party, the junior party in Chancellor Angela Merkel’s coalition, has fought an uphill battle to shield small lenders from the fees.
“We don’t seem to have a chance to get an exemption for small banks from the banking fee,” Ingrid Arndt-Brauer, SPD chairwoman of Germany’s parliamentary finance committee, said by telephone. “We don’t get support for an exemption for small banks in Europe.”
Lothar Binding, another SPD legislator, took a blunt view of where the debate was headed. “There will be a flat rate for all banks, and on top there will be a risk-oriented fee,” Binding said by telephone. “This means that small banks won’t get an exemption. They will have to pay a flat fee.”
The German Finance Ministry declined to offer specifics when asked about the plan. The commission hasn’t yet circulated an official proposal, spokeswoman Marianne Kothe told reporters on May 26. “The principle of proportionality will be safeguarded, and there should be a risk-based component,” Kothe said.
The commission is seeking guidance from national officials on whether they back the plan, and if so what the threshold should be for defining banks that can benefit.
The joint SRM fund, which will be filled over the course of eight years, would be one weapon available to regulators for stabilizing a crisis-hit bank or covering the costs of winding it down.
A separate piece of EU law, known as the Bank Recovery and Resolution Directive, requires similar funds to be set up in non-euro nations. Both pieces of legislation were approved by legislators this year.
The commission is in charge of developing draft plans for the levies, which will then be send for approval to governments and the European Parliament. Michel Barnier, the EU’s financial services chief, has told ministers that the commission will make its proposals in September. It is set to seek public comments this month.
Under the draft EU plans, the standard approach would be for a bank’s levy to be calculated by working out the flat fee, based on total liabilities minus own funds and covered deposits, and then multiplying this by the risk factor.
The commission has whittled down the list of criteria to be used in calculating this risk factor, compared with a note it submitted to national experts last month.
Those still in the frame to be used include factors such as banks’ risk-weighted assets, leverage ratios and stocks of liquid assets.