18 February 2014

Bloomberg: Schäuble counters push to speed common euro bank failure fund

Germany's finance minister blocked efforts by his European counterparts to speed the move to a common resolution fund as they rush to create a system for handling failing euro area banks.

In talks on how to break a deadlock with the European Parliament on the Single Resolution Mechanism bill, Dutch Finance Minister Jeroen Dijsselbloem proposed allowing the SRM fund to sell debt guaranteed by euro states during its 10-year build-up period. This would fill the fund to its €55 billion capacity quickly and ease the contentious issue of how quickly to pool money for covering the cost of saving or shuttering banks, he said.

Schäuble shot this idea down immediately after the meeting in Brussels. “If we mutualise and then we set up a lending capacity and then we agree to joint liability, and then the bill and the risk remains with the taxpayer, this is exactly what we’re not going to do", he told reporters.

Sharp divides have emerged on how to decide when a bank is failing, the role of public backstops and how the bank-financed fund should operate, including how long to preserve national compartments that limit access to the fund during its first decade.

At the meeting, ministers warned that markets may continue to flare unless they receive a strong signal that the system is strong enough to withstand emergencies. They remained divided on the issue of a public backstop to stand behind the resolution fund. “The financial system, as the political system, depends on credibility", said Portuguese Finance Minister Maria Luis Albuquerque. “Having a credible backstop to support the whole resolution fund is of critical importance. If we set up an elaborate mechanism that doesn’t have a credible backstop, then all of the principles that we have been highlighting as very relevant may become irrelevant.”

ECB Vice President Vitor Constancio said that bank supervisors need a practical system for handling banks that are too weak to survive. If the EU designs a resolution mechanism that can’t operate quickly in an emergency or doesn’t have access to necessary resources, supervisors might hesitate to act as needed, he said.

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However, the FT reported that Schäuble has suggested Berlin is prepared to speed up the pooling of EU bank rescue funds if levies on banks to finance the system are also raised more swiftly. Mr Schäuble’s concession, made during the ECOFIN meeting, was the first signal he was prepared to compromise on the new bank rescue system in the face of strong criticism of Germany’s stance from the European Central Bank. Berlin has been reluctant to hand control of common EU bank rescue funds to Brussels quickly, even though a new EU supervisor will start overseeing eurozone banks within the next year. Germany is one of the only eurozone members with its own national bank resolution fund, and its banks have lobbied strongly to avoid ceding control of this to Brussels.

Mario Draghi, the ECB chief, said this month that finance ministers should consider “doubling the pace” so that the fund would be fully mutualised within five years, though he did not suggest any speeding up or increasing of levies to pay into the fund.

Mr Schäuble made it clear that Berlin thought the two should be linked. “If 10 years is too long to build the fund, let’s speed up – but not only the speed of mutualisation but the speed of paying in", he said during a public session of the ministers’ deliberations.

Ahead of Tuesday’s meeting, Pierre Moscovici, the French finance minister, said he wanted to go even further, with full pooling of cash from the start: “I want the single resolution fund to have a mutualised element from the start, and that element should grow as quickly as possible".

Mr Schäuble was also resistant to proposals that would allow the fund to borrow money in cases where the embryonic system was short of funds. He said only national pots within the fund should be given such powers, and with the consent of national governments involved. Under such a plan, the new European system would not be able to borrow money for a bank rescue on its own. “The borrowing must depend on the approval of the Member State of the compartment that has to lend", Mr Schäuble said.

Further reporting (FT subscription required)

© Financial Times