Clash Over EU Bank Fund Puts New Year Deadline in Jeopardy

Updated on
  • Gramegna says guidelines in works for national credit lines
  • Dijsselbloem says nations' existing pledges are sufficient

Euro-area nations clashed Tuesday over how to assure backup funds for a new bank-resolution fund, suggesting a deal may not be in place by the Jan. 1 debut.

The Netherlands joined Germany in resisting a speedy deal on backstop financing for the Single Resolution Fund, which was designed to make lenders pay a bigger share of cleanup costs when a large financial firm fails. The fund will cover nations that take part in the euro area’s banking union and needs interim financing until industry contributions build up to a projected 55 billion euros ($62 billion).

Other nations said it would be irresponsible to launch the fund without a clear framework that ensures cash on hand in an emergency. Austria led calls for the European Stability Mechanism to step in immediately, while other nations said they’d support a compromise of national credit lines followed by a transition to the euro-area’s firewall fund once its treaty can be changed.

Finance ministry deputies are now designing a term sheet for countries to use when putting national credit lines in place, Luxembourg Finance Minister Pierre Gramegna told reporters after ministers met Tuesday.

“We’ve clearly identified that there’s one way that we can achieve a backup for the Single Resolution Fund and the track that’s being followed is the one of national credit lines,” Gramegna said in a press conference. “As they are national credit lines, obviously there’s also a national aspect in it but the term sheet is intended to give guidelines.”

Gramegna is at the center of the negotiations as Luxembourg holds the European Union’s six-month rotating presidency.

‘No Problem’

European leaders turned to the banking union as a way to break the link between troubled banks and struggling sovereigns that plagued the euro area during its debt crisis. Contagion between banks and governments led five of the euro area’s 19 nations to seek bailouts and those connections are still seen as a major source of financial risk within the common currency and the broader 28-nation European Union.

The European Central Bank is now supervisor for the euro area’s biggest banks, with eventual oversight over all the region’s lenders. Starting next year, failing banks will be handled by the Single Resolution Mechanism, a new agency that will manage the common resolution fund.

Dutch Finance Minister Jeroen Dijsselbloem, who helped broker the banking union agreement as head of the euro-area finance ministers’ group, said there’s “no problem” with the current arrangements and a deal on a common solution by Jan. 1 isn’t essential.

"Countries are responsible for having a credit line ready” and ”in principle that should be the case for every country before Jan 1,” Dijsselbloem said. “Some countries can fund it directly, other countries will have to make arrangements.”

Some countries want the ESM to provide the guarantee “but the Netherlands is not in favor of that,” he said. “It would also require an ESM treaty change -- that’s a illusion it can be done before Jan. 1.”

Homework for Members

Austrian Finance Minister Hans Joerg Schelling disagreed. He argued that national obligations would put an undue burden on individual countries to finance a system set up to protect the common good.

“Some states are bringing back the idea of guarantees. For us that’s not a workable solution,” he said, acknowledging that updating the ESM’s mission probably can’t happen by year-end.

EU banking authorities have said the EU needs to make a decision quickly on the bridge financing so financial markets can have confidence the resolution fund will work when needed. Single Resolution Board Chair Elke Koenig said the financing is “the member states’ homework,” while the ECB’s Benoit Coeure said the new fund needs to have “full credibility” from day one.

“We will not move the goal posts at this particular moment,” Finnish Finance Minister Alexander Stubb said after the meetings. “The details have been ironed out, but there’s no need to change the system. So we’ll stick to the national commitments that we have.”

— With assistance by Rainer Buergin, Ian Wishart, Mark Deen, Jonathan Stearns, and Karl Stagno Navarra

(Updates with comments from Gramegna in fourth paragraph.)
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