Eurozone finance ministers yesterday made progress on some details of a plan to close banks, paving the way for completion of a eurozone “banking union” that is to restore confidence in the financial sector and boost growth.
German Chancellor Angela Merkel underscored the importance of the negotiations to complete the banking union, saying she hoped the ministers would reach a deal before she and other EU leaders meet today.
“For the acceptance of the euro on financial markets, the banking union is very important,” Merkel said on Tuesday.
That gives finance ministers 36 hours to clinch overall agreement on an agency and fund to shut weak banks to complement European Central Bank (ECB) supervision of the sector if EU leaders are to sign off on it this week.
A crucial part of the project was agreed in the small hours yesterday after seven hours of talks — how to ensure financing for closing down banks.
This agreement boosts chances of an overall deal on the blueprint on dealing with failing lenders later yesterday — in time for the deadline set by Merkel and other EU leaders and boosting chances the reform will become reality in 2015.
Under the agreement, banks will provide the cash to pay for the closure of failed lenders, giving roughly 55 billion euros (US$76 billion) over 10 years accumulated in a Single Resolution Fund (SRF).
Until then, however, if there is not enough money from the fees, governments will be able to impose more levies on banks. If that does not suffice, they would help with public money.
If a government would not have enough money, it could borrow from the eurozone bailout fund, the European Stability Mechanism (ESM), like the Spanish government did to recapitalize its banks last year, according to the deal reached by eurozone finance ministers.
“In the transitional period, bridge financing will be available either from national sources, backed by bank levies, or from the ESM, in line with agreed procedures,” a draft statement by eurozone finance ministers said.
This is a victory for Germany, which was reluctant for eurozone countries to share the costs of winding down banks elsewhere in the eurozone for as long as possible.
After the build-up phase in 2025, when the SRF is full, additional money for emergency financing could be raised by the fund itself through borrowing, the draft eurozone ministers’ agreement said.
“A common backstop will be developed during the transition period. Such a backstop will facilitate the borrowings by the SRF. The banking sector will ultimately be liable for repayment by means of levies in all participating Member States, including ex-post,” the statement said.
Ministers have already agreed on another plank of a banking union, making the ECB supervisor of the region’s largest banks from the end of next year.
An agency for winding up problem banks remains to be sorted out. There is a question mark over the new procedure for closing a bank. Documents circulating among diplomats and seen by Reuters show an increasingly complicated structure emerging.
“The proposal on governance looks very complicated,” said Michael Noonan, finance minister for Ireland, which saw its economy almost collapse after its banking crisis.
“In resolving a bank, one would want to be able to do it over a single weekend at the maximum. So anything that is too cumbersome, with various layers to it, won’t be effective,” Noonan said.