Brussels, 06/05/2014 (Agence Europe) - On Monday 5 May, the Eurogroup laid down a number of criteria for direct bank recapitalisation from the European stability mechanism (ESM) from 2015 onwards, once the outcomes of the bank stress test and Asset Quality Review are known in October.
“We made very good progress today. I put on the table a final proposal which was broadly supported and will allow ministers to seek where necessary a parliamentary mandate with a view to a political decision which we can take before our next regular meeting on 19 June”, said the head of th Eurogroup, Jeroen Dijsselbloem, stressing that the recapitalisation option would only be available as a last resort.
In June 2013, eurozone finance ministers decided on direct bank recapitalisation guidelines for the ESM (see EUROPE 10871). The mechanism will have a budget of €60 billion and aims to weaken the link between bank woes and sovereign debt problems by giving countries some respite so they do not have to pay the full cost themselves of bailing out big banks registered in their country.
Once the details of the bank resolution mechanism (SRM) have been finalised (it is to be introduced in the eurozone in 2016), its operational rules will need to be decided upon by the end of 2015, a very busy year because, in October 2014, the European Central Bank and the European Banking Authority (EBA) will be unveiling the results of their tests of European banks ahead of the ECB becoming the eurozone bank supervisory body in November.
Dijsselbloem explained: “My proposal on direct recap foresees that in 2015 a bail-in of 8% of total liabilities and the use of the national resolution funds up to the 2015 target level will be preconditions to use direct recap. As of 2016, as you know, the full bail-in rules of the BRRD will apply (Ed: see EUROPE 11061). Mainly the last stretch of our discussion was on the bail-in regime in the transitional year of 2015”. The BRRD directive requires national bank resolution funds to be set up in 2015 and financed to the tune of 0.1% of eligible deposits by the end of the first year. He admitted that this was a low level of funding, but it has to be kept available and used first in the event of any problem.
Once the results of the ECB and EBA's tests have been published, banks will have six to nine months to recapitalise, where necessary, if capital shortages are identified (see EUROPE 11069). Banks will have to turn first to the markets to raise capital, selling off assets or making other provisions. Dijsselbloem welcomed the proactive approach being taken by the banks, which are already raising funding from the money markets. If private capital is insufficient to fill the capital gap, then banks would be able to ask for public bailouts. Aid from the ESM would only be available as a last resort, firstly in the form of an indirect recapitalisation via the country of origin (as was used for Spanish banks) or, possibly, through the direct recapitalisation mechanism.
On Tuesday 6 May, the Eurogroup enshrined the BRRD directive. (MB)