EU Mulls Faster Pooling of Resources If Needed When Banks Fail

Jan 27, 2014 7:01 pm ET

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Jan. 28 (Bloomberg) -- Euro-area finance ministers said they’d consider pooling money in a planned bank resolution fund at a faster pace than previously foreseen.

German Finance Minister Wolfgang Schaeuble and his Irish counterpart, Michael Noonan, suggested that the 55 billion-euro ($75 billion) Single Resolution Fund could be fully armed in less than the 10 years set out in draft proposals. The fund would back up a proposed euro-area bank-failure authority.

A shorter time frame may make it easier for ministers to reach an agreement with the European Parliament on the final text of the Single Resolution Mechanism bill before the assembly adjourns for May elections. The assembly and the European Central Bank have pushed for the single fund to pool its resources in less than a decade to enhance financial stability.

“The question is what kind of levy can the banks pay in what time frame,” Schaeuble said in Brussels yesterday. “If there’s a readiness to say it should go faster, then the banks will have to pay more in a shorter period of time. I don’t think it will be easy to reach an agreement on this.”

The new resolution agency would work alongside the European Central Bank, which assumes supervision of euro-area banks on Nov. 3. The European Union is overhauling the oversight and resolution procedures of euro-area lenders as part of a banking union it’s creating to prevent another financial crisis.

Firewall Fund

Resolution has taken on new importance now that the ECB is examining bank balance sheets as it prepares for its supervisory role. To assuage concerns about euro-area governments’ ability to cope with large-bank failures, nations are considering an explicit commitment to provide bridge financing when states can’t rely on the common fund.

Under the current plan, nations that need cash to manage a banking crisis can apply to the currency zone’s European Stability Mechanism firewall fund, as Spain did in 2012. A new proposal makes that strategy explicit and also mentions national sources as an option, while reiterating that the banking sector would need to repay the money.

At yesterday’s meeting, ministers took up the ECB’s concern that the Single Resolution Fund will take too long to establish. ECB Executive Board member Benoit Coeure said last week that the 10-year transition period is “too long and should be shortened, possibly to five years.” A day later, ECB President Mario Draghi underscored this assessment.

Single Pot

Noonan said he supported the ECB’s call for the fund’s resources to be merged into a single pot more quickly.

“What President Draghi is saying is that, rather than taking 10 years to full mutualization, the discussion should be re-opened so that full mutualization would be arrived at in a shorter timetable and I agree with that,” Noonan told reporters in Brussels. “Obviously President Draghi has started a new debate.”

While Noonan hinted at possible German flexibility on this, others warned that changing the plan brought its own risks. French Finance Minister Pierre Moscovici said the current SRM plan was “possible to improve,” while cautioning that existing agreements have already been difficult to achieve.

Dutch Finance Minister Jeroen Dijsselbloem, who leads the euro-area finance ministers’ group, said changing the time frame may be too ambitious. The fund’s target size is too big to raise immediately, he said.

National Lines

“You can’t get 55 billion on the table at once,” he said. “You can want that, but it would be unwise.” He also endorsed plans to keep contributions separated along national lines until the fund is full.

“Gradual mutualization is part of the political agreement,” Dijsselbloem said. “That is sensible. It indicates legacy issues will remain national governments’ responsibility, but gradually less so.”

While the euro area debates its long-term bank resolution plans, nations are also trying to finish work on how the European Stability Mechanism might provide direct recapitalization to banks without adding to government debt.

Nations now are aiming to agree on the final version of this new ESM tool by March 10, according to a joint French- German statement. Dijsselbloem said he had confidence Germany would follow up with required national procedures by October so the tool could be ready when the ECB announces the results of its assessment of euro-area lenders.

Direct Aid

EU ministers are discussing whether the direct-aid tool should be phased out once the common resolution fund is up and running, according to one EU official. Dijsselbloem said ending it outright would run counter to the original agreement to set up the new procedures.

“In the June agreement on what the fund would look like, we didn’t agree it would be temporary,” Dijsselbloem said.

“I do think that when we get the banks in order and the fund is filled and operational, the use of the direct recap will be limited even further,” Dijsselbloem said. “I don’t expect it will be used often anyway.”

“In that sense it could turn out to be a temporary instrument in practice,” he said. “But that is not what we agreed on. And as chairman of the euro group I’d wish to keep all parties to the agreements we have made. Otherwise we will all start negotiating backward.”

--With assistance from Jeff Black, Zoe Schneeweiss, Dara Doyle, Jim Brunsden, Karl Stagno Navarra, Rainer Buergin, Mark Deen, James G. Neuger, Ian Wishart and Jonathan Stearns in Brussels and Radoslav Tomek in Bratislava, Slovakia. Editors: Patrick Henry, Dara Doyle