(See TOP CRIS for more on Europe’s debt crisis.)
Oct. 16 (Bloomberg) -- European Union finance ministers grappled with how to protect the credibility of next year’s bank reviews as the countdown began for the European Central Bank to assume oversight over euro-area lenders.
During talks in Luxembourg yesterday, a rift emerged between proponents of enhanced backstops to cover any capital shortfalls that may be uncovered by the ECB-led bank assessments and those who maintain that existing options will suffice.
Dutch Finance Minister Jeroen Dijsselbloem touted Spain- style indirect recapitalization from the euro-area firewall fund and direct aid to banks in “exceptional circumstances” as credible backstops. Germany’s Wolfgang Schaeuble countered that direct bank aid from the European Stability Mechanism would require changes to German law.
Dijsselbloem “doesn’t need to be happy about it, I don’t demand that from him, but it helps if everyone takes notice of it,” Schaeuble told reporters of the legal issue. “It is how it is, the ESM decides unanimously, and the German rule under German law states that the law has to be changed. And for that, one will have to do a lot of work convincing certain people in Berlin.”
The debate over backstops has direct implications for the success of the ECB’s assessments of the banks it will begin to supervise as soon as November 2014, and of stress tests coordinated by the European Banking Authority. Ministers yesterday gave final approval to the ECB oversight law, which enters into force when it’s published in the EU’s Official Journal.
ECB Executive Board member Joerg Asmussen said before the talks that “we need discussions” on how to cover any large capital shortfalls at big banks. He didn’t address the issue in comments made as he departed.
“It is important that we are get a very credible asset quality review and also credible stress tests, so therefore it is essential that euro countries can set up a backstop,” Swedish Finance Minister Anders Borg said after the meeting. “I think it is essential that ECB provides liquidity during this period. A long-term repo facility or something else is necessary to keep liquidity in the system.”
Germany’s legal requirements mean the ESM isn’t now available for Ireland’s bank debt, Schaeuble said, even though EU ministers previously said direct aid could be available after a case-specific review.
“The retroactive bank recapitalization is especially improbable for the time being,” Schaeuble said. He also signaled that a follow-on credit line was off the table. “I don’t see that Ireland is asking for any additional ESM program and I don’t see any necessity for this.”
EU leaders last year sought to empower the ESM to lend directly to banks in a bid to break the link between sovereign debt and financial-industry struggles. While the direct-aid tool remains in development, leaders now are emphasizing national responsibility for stabilizing banks that need help.
Countries whose banks will fall under ECB supervision next year should establish “a comprehensive European approach notably comprising national backstops,” according to draft conclusions for an Oct. 24-25 leaders’ summit obtained by Bloomberg News. The draft calls for nations to “develop as a matter of urgency such a comprehensive and coordinated approach to be communicated before the end of the year.”
The ECB has pushed national governments to have money ready when the results of the bank reviews come out next year, if banks can’t raise private capital to cover any shortfalls detected. Benoit Coeure, another ECB Executive Board member, said this week that the ESM should be ready if states need assistance. Under current protocols, this requires governments to apply for aid in exchange for policy conditions, as Spain has done.
Ministers reiterated their goal of creating a centralized system for handling crisis-hit euro-area banks by Jan. 1, 2015. Schaeuble renewed Germany’s opposition to moving ahead with a Single Resolution Mechanism, proposed by EU financial-services chief Michel Barnier, that includes a central fund, while also pressing for quick agreement on a policy that works with current rules.
“We’re still in a brainstorming phase,” said Italian Finance Minister Fabrizio Saccomanni. “It’s essential that this project go forward because there’s a lot of international attention on what is being done in Europe, and reaching a full banking union will help orient market sentiment.”
Schaeuble cautioned that talks will continue, because Barnier’s proposal “has no majority” among the 28 EU states. “We’ll have to find solutions within the current treaties,” he said. “I hope that everyone is prepared to reach a solution as soon as possible.”
--With assistance from Angeline Benoit, Corina Ruhe, Jonathan Stearns, Karl Stagno Navarra, Stephanie Bodoni and Alessandra Migliaccio in Luxembourg. Editors: Patrick Henry, Kati Pohjanpalo