Brussels, 15/10/2013 (Agence Europe) - Divisions between eurozone nations in favour of intervention by the European Stability Mechanism (ESM) to bail out failing banks and those opposed to the idea arose on Monday 14 October at the meeting of Eurogroup, against the backdrop of the fact that the bank assessments to be carried out in 2014 by the ECB and the European Banking Authority (EBA) may well reveal capital shortfalls.
One thing is certain - the ESM will intervene as a last resort to aid failing banks, but private solutions must come first. The head of Eurogroup, Jeroen Dijsselbloem, explained that there is wide support in the eurozone for the following: a bank would first have to seek its own capital from the markets or by selling assets; - when it has raised all its can in this way, if there is still a capital shortfall, then funding may be sought from the member state; this public aid will be subject to the EU state aid rules adjusted in the summer to include bail-ins to force junior bondholders to accept losses before the stricter BRRD Directive comes into force in 2018 laying down rules for bank resolution; - if there are still capital shortfalls after this, then the eurozone's bailout fund (ESM) can act as a lender of last resort.
Countries disagree on the timing for ESM intervention. Dijsselbloem says the bailout of a bank by the ESM would be possible in principle when the bank supervision mechanism under the aegis of the European Central Bank (ECB) (whose legal basis was finally settled on Tuesday 15 October, see EUROPE 10942) comes into operation in the autumn of 2014. He said that in exceptional circumstances, intervention might be possible before the ECB starts directly supervising the eurozone's 130 big banks.
Germany says, however, that direct bank bailouts are simply not possible at this stage. Before they can be possible, the political agreement reached in June must be legally formulated and endorsed by a unanimous decision on the ESM's board of governors, which operates inter-governmentally (see EUROPE 10871). In any case, a change of German legislation would be required before the ESM can directly bail out banks. “The retroactive direct bank recapitalisation is especially not probable for the time being, because there is no direct bank recapitalisation, it is not even in the given treaty, and in Germany we need a change of German legislation [for that],” explained Wolfgang Schäuble.
Euro Commissioner Olli Rehn said that the general rule for how direct ESM bank recapitalisation would proceed is that banks would be bailed out by the member state of origin, forcing the country where the bank is registered to bear the financial burden. This is what happened in Spain, which then received €41 billion in aid to help it recapitalise its banks. Rehn says that direct bank recapitalisation, the point of which is to separate off bank problems from national debt, would only ever occur on an exceptional basis.
France, however, wants more flexible use of the ESM. Economy minister Pierre Moscovici says it should be used as a safety net where needed and although it would be exceptional it should not be forgotten. Moscovici did not give any indication of hierarchy for the two ESM options for direct bank recapitalisation. He said the details still needed to be worked on, but everyone agreed on the basic idea.
Work is under way at technical level to turn the ministerial agreement into legal rules for the direct recapitalisation of banks, for which €60 billion has been earmarked. Guidelines will need to be issued once final agreement has been reached on the BRRD Directive on national bank resolution schemes.
SRM. Now that there is agreement on bank supervision, attention is focusing on the resolution side of Banking Union. The Lithuanian Presidency is planning to sound out the member states on the main areas of disagreement over the draft legislation on the table before drafting a compromise ahead of the ECOFIN Council in November. Internal Market Commissioner Michel Barnier listed the areas to be settled: - the European Commission's role in triggering the winding up of a bank; - voting on the European resolution committee of national bank resolution authorities; - relations between the country of origin and countries where cross-border banks have branches; - strict respect of member states' budget sovereignty; - and how the system is to be financed. The Commission wants a single fund for the eurozone, but Germany wants a network of national resolution funds. (MB/transl.fl)