EU Puts Bank-Union Credibility on Line in Resolution Talks

Jan 08, 2014 6:56 am ET

(Updates with comment from European Parliament in seventh paragraph. Click here for European debt news.)

Jan. 8 (Bloomberg) -- The credibility of Europe’s efforts to restore confidence in its financial system hangs in the balance as lawmakers try to broker a deal on a bank-failure authority for the 18-nation euro area.

As U.S. Treasury Secretary Jacob J. Lew tours European Union capitals to push for tougher banking regulations, European Parliament legislators and officials from Greece, which holds the EU’s rotating presidency, begin negotiations in Brussels today to create a central agency for saving or shuttering euro- zone banks before elections in May.

When EU finance ministers ended a fractious debate and settled on a blueprint in December, European Central Bank President Mario Draghi “strongly” welcomed the plan, though it diverged broadly from the ECB’s position. The parliament’s stance is closer to the original proposal made in July by Michel Barnier, the EU’s financial-services chief. Now the two sides will try to reach a compromise on the legislation.

“With the political clock ticking in Brussels, and with evidence of regulatory fatigue on a number of fronts, it’s all about reaching a position that allows those concerned to claim that plans for a banking union are moving ahead, but at the same time leaving many details to be worked out over the coming months or even years,” said Richard Reid, a research fellow for finance and regulation at Scotland’s University of Dundee.

Debt Crisis

The Single Resolution Mechanism bill is part of an effort to build a banking union that would sever the financial links between lenders and sovereigns that fueled Europe’s debt crisis.

Barnier’s proposal for a strong central authority backed by a single fund to cover resolution costs met with broad approval from the parliament and the ECB, but faced an initial barrage of German-led complaints from governments, centered on warnings that the blueprint went too far in taking financial decisions out of national hands, and that some of the measures overstepped what’s possible under the bloc’s treaties. The final bill must be approved by the parliament and member states to take effect.

“Positions are far apart,” with parliament lawmakers “insisting that the system must not be cumbersome or vulnerable to political back-room deals,” the assembly said in a statement on the “tough negotiations” that begin today.

As the talks begin, Lew is pressing European officials to follow the U.S. in adopting tougher banking regulations to ensure that American financial firms aren’t put at a competitive disadvantage. His trip takes in France, Germany and Portugal.

Central Control

In reaching a common position on the bank-failure plan, EU finance ministers overcame conflicts that pitted big nations against small ones, euro members against those outside the currency bloc, and Germany’s desire to shield taxpayers against ECB calls for central control.

The finance chiefs pledged to create a 55 billion-euro ($75 billion) industry-financed resolution fund over the next 10 years, backed an agency to make decisions on handling failing banks and agreed on cost-sharing procedures.

Yet they postponed decisions on how they’ll jointly back up the new system, saying that a common public backstop would be developed in coming years. And they split the proposal in two, with the resolution agency created through EU legislation. Financing arrangements would be set up in a separate agreement among nations, cutting out the European Parliament.

‘Serious Possibility’

Elisa Ferreira, who is leading the parliament’s negotiation team on the draft law, has said that it’s “a very serious possibility” that no deal will be possible on the bill, because the ministers’ plan is “completely different” from the parliament’s.

Between October 2008 and October 2011, EU governments made available 4.5 trillion euros in approved bank assistance, according to European Commission data, including 409 billion euros in asset relief and recapitalization. Barnier has said the bank-failure plan is essential to prevent a repeat of such taxpayer bailouts.

The “most important” aspect of the plan “is the operational structure, which seems far too complex” in the version approved by finance ministers,’’ said Karel Lannoo, chief executive of the Centre for European Policy Studies in Brussels. “But in practice it means that the ECB will have a more important role.”

Sharon Bowles, chairwoman of the assembly’s Economic and Monetary Affairs Committee, said negotiators “should try to take the best from both texts,” specifying that the opinions voiced were her own, not those of the committee.

Alternative Basis

Potential compromises could include scrapping the intergovernmental treaty in favor of an alternative basis in the EU treaties, she said. Parliament should also fight for clear provisions in the law making the ECB responsible for deciding if a bank is in crisis and handing it to the resolution agency, and for a faster pooling of national funds, Bowles said.

“Given the piecemeal and fractious approach to agreeing these new resolution procedures, it is to be hoped that they are not seriously tested in the near future,” the University of Dundee’s Reid said. “Perhaps this is one reason why the policy focus has moved much more in the direction of looking at ways of supporting the provision of credit to needy parts of the economy in order to support economic recovery.”

--With assistance from Rebecca Christie in Brussels. Editors: Patrick Henry, Zoe Schneeweiss