In the absence of detailed plans to backstop the fund, the potential costs of bank support will continue to be a factor in Fitch's eurozone sovereign ratings.
The agreement on a general approach to a Single Resolution Mechanism (SRM) supports Fitch Ratings' view that there is a strong consensus for eurozone reform to deepen economic and monetary union, but breaking the link between banks and their domestic sovereigns remains a remote, long-term goal.
The agreement is a step towards Banking Union, and can boost long-term confidence in the stability of the eurozone. However, the size of the resolution fund, the time it will take to be fully funded, and the slow pace of mutualisation limit its capacity to fulfil the aim, first outlined in June 2012, of breaking the link between sovereigns and banks. However, the combination of debt that can be bailed in and the resolution fund should reduce future contingent liabilities for sovereigns.
The agreement on 18 December was reached ahead of a self-imposed year-end deadline. This was to boost the chances of agreeing the SRM regulation before next May's European Parliamentary elections. The agreement would see bank levies used to fund a single resolution fund that "would initially consist of national compartments that would be gradually merged over 10 years". National contributions would build the fund up to €55 billion in that time. A single resolution board would be set up "with broad powers in cases of bank resolution".
A €55 billion fund would help resolve individual bank failures privately, especially as there is a minimum bail-in requirement of 8 per cent of liabilities before resolution funds can be used. (The ability to bail-in senior unsecured creditors from 1 January 2016 instead of 1 January 2018, as originally proposed under the final Bank Recovery and Resolution Directive, was agreed earlier this month).
Nevertheless, during the build-up, and even when the fund reaches its target size, the committed funds would be too small to cope with a systemic eurozone banking crisis. Eurogroup and ECOFIN Ministers acknowledged that "situations may arise when the [fund] is not sufficiently funded by the banking sector, especially in the initial period but also in the steady state". There are therefore plans to develop a common backstop, fully operational after at most ten years, which would enable the fund to borrow and be reimbursed through banking sector levies "including ex-post".
Wednesday's agreement says that the single resolution fund would be back-stopped in its initial phase by bridge-financing from national sources, backed by bank levies, or from the European Stability Mechanism, according to existing procedures." In Fitch's view this implies that the €60 billion of ESM funds earmarked provisionally for bank recapitalisation would be lent to their sovereigns, rather than injected directly into troubled banks.
In the absence of detailed plans to backstop the fund, the potential costs of bank support will continue to be a factor in Fitch's eurozone sovereign ratings.
Press release
© Fitch, Inc.
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