Brussels, 10/12/2013 (Agence Europe) - On Tuesday 10 December, the Ecofin Council attempted to find a new negotiating mandate for the Lithuanian Presidency for the inter-institutional talks this Wednesday on the draft BRRD directive harmonising national bank restructuring and resolution schemes and the DGS directive on deposit (savings) guarantee schemes.
Of the seven issues to be discussed, the question of government stabilisation tools demanded by the European Parliament is particularly distasteful to the European Commission and a number of member states, which fear a return of state bailouts of banks, and a de facto challenging of the bail-in rules that would get private investors (shareholders, bondholders and savers in that order) to contribute before any public money is forthcoming.
If strict application of bail-ins is not applied, that would challenge the whole question of banking union, said the head of the Eurogroup, Jeroen Dijsselbloem. He was backed by his German, British, Danish and Finnish colleagues. In June, the Ecofin Council reached agreement in principle on the draft BRRD directive and Germany's Finance Minister, Wolfgang Schäuble, said that the message had been clear - the time of bailouts is over (see EUROPE 10876). He said that the message must not be undermined. French minister Pierre Moscovici said there was the danger of increased financial fragmentation if public money was used to bail out banks.
The Commission agrees. As Internal Market Commissioner Michel Barnier put it, the danger is of introducing double standards, with member states that can afford to bail out their banks and others that have to use bail-ins. He said the criteria for the use of “government stabilisation” (bailouts) have to be strictly applied. He said the criteria drawn up by the Lithuanian Presidency went in the right direction: - allowing the use of public funding as the “very last resort” when the Council of Ministers says the situation has reached the emergency stage; - applying the bail-in rules beforehand to shareholders and junior bondholders as required under EU state aid rules, after consulting the Commission; - introducing a transition period until the bail-in rules in the draft directive come into force.
Preventive recapitalisation. Most countries want to be able to recapitalise viable banks preventively (in other words, banks that meet the capital requirements but which the upcoming stress tests of the European Banking Authority (EBA) will show a need to increase their capital). The ECB wrote to the Commission in the summer about the risk of capital shortfalls coming to light.
Barnier said he shared the EP's doubts about the idea of using public money to recapitalise solvent banks (without winding up the bank). He said that conditions would have to be met, such as: - full respect of state aid rules; - beneficiary banks must not be failing or predicted to fail; - preventive recapitalisation would only be used for banks for which the EBA stress tests, the results of which are due in the autumn of 2014, reveal capital shortfalls.
Several member states, including Greece, France, Italy, Luxembourg and Portugal, rejected any restrictions on the use of preventive capitalisation, but agreed to the idea of a review clause being inserted. George Osborne said that stress tests at national level should also allow preventive recapitalisation, not just the EBA stress tests.
A key aspect of the new legislation is the date when the bail-in system would come into play. The earlier it is the less likely banks would get a public bailout. Although the Council of Ministers' agreement says 2018, several member states, like Austria, Denmark, Finland, Latvia and the United Kingdom, say this should be brought forward to 2016, as desired by the European Parliament, or better still 2015, when the single resolution mechanism is set up. Bulgaria, Poland and Portugal are sticking to 2018, in order to allow banks time to adjust.
Funds. The BRRD directive provides for the creation of national funds to finance bank resolutions. On Tuesday, the Lithuanian Presidency's draft compromise said that the resolution funds should be separate from savings guarantee funds, but the two funds should be able to lend to each other. The question of how much money the two funds should have has not been settled. The Commission says that making use of bail-ins, each of the funds should have 1% of the savings covered by them. Scandinavian countries called for at least this amount, whereas Poland and the United Kingdom did not see the need to change the Council of Ministers' agreement in principle of 0.8% of savings covered for the resolution fund. The vast majority of countries say that the savings guarantee fund should not turn into a bank bailout fund, although Italy raised the idea of deposit guarantee fund being able to use this cash to bail out banks as a preventative measure. (MB/transl.fl)