Luxembourg, 21/06/2013 (Agence Europe) - From the autumn of 2014 onwards, the European Stability Mechanism (ESM) will be able to provide recapitalisation of big banks, on a case-by-case basis, in the eurozone that are supervised by the ECB. This would only be allowed as a last resort, if all other restructuring measures being set up as part of Banking Union were to fail.
Eurogroup has reached broad agreement on the main way that a direct bank recapitalisation by the ESM would work, explains the head of Eurogroup, Jeroen Dijsselbloem, which he said would help reduce the risk of contagion to the rest of the eurozone through a bank crisis leading to a sovereign debt crisis. The system will be a new short-cut, explained French economy minister Pierre Moscovici.
On Thursday evening, Eurogroup talks focussed on the sharing of the financial burden for bank restructuring by the private sector, the country of origin of a bank that might receive direct capitalisation from the eurozone and the ESM. Eurogroup adopted guidelines that law down a clear hierarchy, with the first solution being the search for private finance, including from shareholders and lenders. An appropriate write-down and debt conversion would be sought under the EU rules on state aid and the directive on bank restructuring, although the directive is not expected to include bail-in tools until 2018 or the use of national bank resolution funds in the medium-term (see related article). It is only at the end of this process that the EMS might provide capital to the struggling bank.
Drip-feed. 'We must avoid that there are false expectations in connection with the direct bank recapitalisation. Those who expect that any bank that needs capital can go to the [ESM], that's nonsense,' said German finance minister Wolfgang Schäuble. The direct recapitalisation option will be subject to strict terms and conditions. Of the ESM's EUR 500 billion lending capacity, a maximum of EUR 60 bn will be available for direct bank recapitalisation. The cap has been set in order to preserve the ESM's top credit rating. The upper limit will be revised if necessary, said Dijsselbloem.
The banks that can be covered are the big banks that do not meet the capital requirements set by the ECB, as long as they are fundamentally sound as determined by a tough assessment of their balance sheet. Beforehand, the European Commission would need to give its approval and decide on the conditions for the direct recapitalisation in terms of restructuring of the bank in question.
Countries would be allowed to ask the ESM to directly recapitalise a bank registered in their country only if it does not have the necessary budget to be able to provide the capital itself or if this would jeopardise its ability to raise funding from the markets. The country would retain some of the financial liability for the capital, at a rate of 20% of the total public provision in the first two years following the direct recapitalisation and 10% in the following years. If the bank in question does not meet the optimum capital requirements set by in EU rules (a CET1 ratio of 4.5%), the requesting country would have to fill the gap and provide additional aid if necessary, bearing its share of the burden.
When the ESM becomes a bank shareholder, it would have a commensurate role to play in the bank's management (the commercial model, appointment of managers, allowing or scrapping bonuses). This role would need to be well calibrated to ensure that the bank can easily become autonomous again in the future.
Retroactivity. The idea of the ESM recapitalising banks directly, on a case-by-case basis, has been agreed, even if the bank had previously received a national public bailout before the ESM was set up. Dijsselbloem said that this was an option and it had not been ruled out. This means a decision may be taken in the future about whether to ease the debt of countries like Ireland and Spain that have provided huge bailouts to their banks. (MB/transl.fl)