Jock Fistick/Bloomberg
Michel Barnier, the EU’s financial-services chief, will unveil the European Commission’s proposal for a single bank resolution mechanism today in Brussels, a day after German Finance Minister Wolfgang Schaeuble urged restraint if the bloc is to avoid conflicts with its basic laws.
The European Union’s executive arm is heading for a showdown with Germany over its blueprint for shuttering or restructuring failing banks, a plan intended to complement the European Central Bank’s oversight of lenders.
Michel Barnier, the EU’s financial-services chief, will unveil the European Commission’s proposal for a single bank resolution mechanism today in Brussels, a day after German Finance Minister Wolfgang Schaeuble urged restraint if the bloc is to avoid conflicts with its basic laws.
“I would strongly ask the commission in its proposal for an SRM to be very careful, and to stick to the limited interpretation of the given treaty,” Schaeuble said yesterday. “We have to stick to the given legal basis, as otherwise we risk major turbulence.”
EU leaders last month reiterated their support for setting up the resolution mechanism as an integral part of a planned banking union, without specifying how it should work. At issue is how much authority the new European entity would possess, and what recourse national governments would have to dispute its decisions.
“From a political point of view, the conferral of a power to wind up banks on the commission is arguably the greatest transfer of sovereignty in the history of the EU and points towards a fiscal, as well as economic and monetary, union,” Alexandria Carr, a lawyer in the London office of Mayer Brown, said by e-mail.
Rapid Progress
A draft outline of the EU plan, seen by Bloomberg News, would make the commission responsible for deciding whether action is needed to stabilize or wind down a failing bank, and would also involve the establishment of a cross-border resolution fund financed by the banking industry.
Both the commission and the ECB have urged rapid progress toward a centralized system to bolster confidence in the bloc’s banks and break the financial link between lenders and sovereigns. The project has also received support from other euro nations, including France and Italy.
The plan will address a “fragmentation” in bank oversight and an absence of effective decision-making processes that was revealed during the financial crisis, Barnier said in an interview, citing the dismemberment of Dexia SA as an example of authorities having to “improvise” a solution.
The proposal, which will target the euro area and other nations that sign their banks up for ECB supervision, require approval by governments and the European Parliament before it takes effect.
‘Significant Legal Risk’
Germany has repeatedly urged the EU to embark on treaty changes to ease its path to banking union, arguing that the bloc’s current rulebook limits the powers that can be handed to central authorities. It has sought to build support behind an alternative blueprint for a network of national resolution authorities.
A central authority that is ultimately backed by the taxpayer “would imply significant legal risk both in terms of European law and constitutional law,” according to a discussion paper circulated by the German government in March.
Other nations have rejected the need for up-front treaty changes, warning that they would cause unacceptable delays.
The commission’s plan has been designed to prevent decisions about the commitment of national taxpayer money being taken out of national hands, Barnier said.
‘Exceptional Cases’
“The text states explicitly that the resolution board would not, in any scenario, be allowed to commit a member state’s public money without its agreement,” he said. “We are talking here about very exceptional cases, as all our rules are aimed at avoiding taxpayer contributions.”
Under the commission’s plan, a bank resolution board, involving national regulators, would assess whether a bank’s finances have deteriorated to the point where intervention is needed, and if so make a recommendation to the commission to initiate resolution.
The board would decide what action should be taken, such as creditor writedowns or asset transfers, and issue instructions to national regulators.
Finance ministers and European Parliament lawmakers began negotiations this month on a related EU law that sets out how forced creditor losses at failing banks should be undertaken.
“From a legal point of view, it is dubious whether the EU’s existing legal architecture is sufficient to support the commission being given such a power or the establishment of what is effectively debt mutualization in the shape of a resolution fund,” Carr said. “And from a practical point of view, it is far from clear how such a mechanism, which would inevitably bring the commission into conflict with the views of national resolution authorities, would work.”
Bank Levies
The single bank resolution fund, which could be tapped to cover restructuring costs at failing banks, would be built up through levies on the banking industry, with individual banks’ contributions linked to the riskiness of their activities. The fund would over time replace national-level backstops and would have the ability to borrow from the market.
Nations are split over how far EU-level measures should be taken to break the bank-sovereign link. Governments in the strongest fiscal position have argued that responsibility needs to fall mainly on national shoulders, with limited access to common backstops, while also trying to reassure investors that the euro area will preserve financial stability.
Lehman Brothers
The haggling is a far cry from 2008, when banks in the biggest European countries, as well as the U.S., required bailouts following the collapse of Lehman Brothers Holdings Inc.
In a single day, Oct. 13, 2008, France, Germany, Spain, the Netherlands and Austria committed 1.3 trillion euros ($1.7 trillion) to guarantee bank loans and take stakes in lenders.
The Dutch government still owns ABN Amro Group NV and only this year took over SNS Reaal NV (SR). Germany established a 500 billion-euro fund to guarantee bank debt. Taxpayers extended aid to Commerzbank AG, Bayerische Landesbank (BLGZ), HSH Nordbank AG, Hypo Real Estate Holding AG (HRX), IKB Deutsche Industriebank AG (IKB) and WestLB AG.
Michael Meister, the deputy caucus leader of Chancellor Angela Merkel’s party in the German parliament, said earlier this month that lawmakers would resist any attempt to set up a common bank resolution fund.
To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net;Rebecca Christie in Brussels at rchristie4@bloomberg.net
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