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European Union Proposes Plan for Failing Banks Germany a Hurdle to European Unity on Banks
(about 5 hours later)
BRUSSELS — European Union officials announced an ambitious proposal on Wednesday for a uniform way to deal with failing banks in the region that would include central decision-making and an emergency fund raised from Europe’s banks. BRUSSELS — European Union officials presented long-awaited plans on Wednesday in hopes of ending the vicious circle in which bailouts of failing banks endanger government finances and the euro currency.
The plan is meant to reduce the chances that struggling governments end up taking their states deeper into debt to save their banking systems, only to face high sovereign borrowing costs that would threaten the stability of the euro currency union. But first they must face down Germany.
“We cannot eliminate the risk of future bank failures,” José Manuel Barroso, the president of the European Commission, said in a statement. But the proposal, he said, helps ensure that “it should be banks themselves — and not European taxpayers — who should shoulder the burden of losses in the future.” Even as officials here laid out their blueprint, the uncompromising stance of German officials like Wolfgang Schäuble was ringing in their ears.
The commission, the European Union’s executive body, would assume significant new power under the system, something that makes some countries, including Germany, skeptical. The plan would require approval by a majority of European Union governments and by the European Parliament before it could go into effect. A day earlier, Mr. Schäuble, the German finance minister, sternly warned the European Commission “to be very careful” with its proposal for a single authority to oversee the wind-down of troubled banks because “otherwise, we will risk major turbulence.”
To be sure, there would be limits to the power of the new centralized system. It could not, for example, order the closure of a bank without permission of the host government if doing so would result in that country’s taxpayers footing some of the bill. And the system would not have access to full amount of the emergency fund for more than a decade. It was in keeping with Germany’s longstanding resistance to sharing financial risk with other European countries. But it was at odds with the more unified approach to European problem-solving that Brussels wants.
Even so, analysts have described the plan as one of the most significant transfers of national sovereignty to Brussels yet proposed in the name of securing the euro. The concern of Germany and other countries about giving such authority to the European Commission could bog the proposal down in months of difficult negotiations. “Germany’s intellectual starting point is national resources for national problems, and that is some way off the European Commission’s proposal, which is looking for a European solution,” said Mujtaba Rahman, the director for Europe at the Eurasia Group. If the proposal fails, he said, there is the danger that “the problematic link between banks and sovereigns will actually have been reinforced, not weakened.”
The proposed bank-failure program, known as the Single Resolution Mechanism, was conceived as part of a broader European banking union whose other provisions would include a single banking supervisor and an agreement to impose any losses mainly on a bank’s creditors and shareholders, rather than taxpayers. The plan presented on Wednesday by Michel Barnier, the European commissioner overseeing financial services, was conceived as part of a broader European banking union whose other provisions would include a single banking supervisor and an agreement to impose any losses mainly on a bank’s creditors and shareholders, rather than taxpayers.
The Single Resolution Mechanism would rely on the European Central Bank to signal when a financial institution in the euro area was facing severe difficulties. The program, dubbed the Single Resolution Mechanism by Mr. Barnier, would rely on the European Central Bank to signal when a financial institution in the euro area was facing severe difficulties.
A resolution board, supported by a staff of around 300 and made up of representatives from the central bank, the European Commission and member states of the union, would then make a recommendation on how to shut down or shrink a bank. The commission would reserve the right to make a final decision. A resolution board, supported by a staff of around 300, and made up of representatives from the central bank, the European Commission and member states of the union, would then make a recommendation, as necessary, on how to shut down or shrink a bank. The board also could draw on a shared fund to help shut down or radically restructure failing lenders after creditors and shareholders have borne some losses.
The board also could draw on the shared fund to help shut down or radically restructure failing lenders after creditors and shareholders have borne some losses. European Union officials want the size of the fund to be about 70 billion euros by the time it is fully financed by 2025, with money coming from levies on banks. European Union officials want the size of the fund to be about 70 billion euros, or $90 billion, by the time it is fully financed by 2025, with money coming from levies on banks.
But the slow buildup of the fund could mean that if bank crises arise in the interim, the new system would be reliant on national funds, and possibly even public money from other euro zone countries. Tapping taxpayer money to bail out other countries’ banks is something that Germany has consented to, but only as a last resort. There would be limits to the power of the new centralized system. It could not, for example, order the closure of a bank without permission of the host government if doing so would result in that country’s taxpayers footing some of the bill.
On Tuesday, Wolfgang Schäuble, the German finance minister, insisted, as he has before, that changes to European Union treaties would be necessary before the Single Resolution Mechanism could go fully into force. Because treaty changes would be laborious and far from certain, Mr. Schäuble is essentially arguing for a potentially long delay to the banking effort. The process was aimed at “involving all relevant national players,” Mr. Barnier said at a news conference Wednesday. But, he said, central management is vital to “allow bank crisis to be managed more effectively in the banking union.”
But France has called for swift adoption of the plan. Giving such a central role to the European Commission, the European Union’s executive arm, could irk both Germany and France, according to some analysts.
During a news conference on Wednesday to present the plan, Michel Barnier, the European commissioner overseeing financial services, sought to underline the need for rules ensuring the stability of European banks, saying that the sector drove investment in a far larger proportion of the region’s economy than is the case in the United States. That “clearly contradicts” a proposal signed jointly by France and Germany ahead of the last summit meeting of E.U. leaders in June, Philippe Gudin, an economist at Barclays, wrote in a research note. Discussions, slated to begin in September among finance ministers, “will likely be long and lively” with the risk of delays because of a lack of agreement, he wrote.
“We’re not going to get diverted by lobbying,” Mr. Barnier said. Mr. Barnier said he wanted the system up and running by January 2015. That would require agreement over the course of next year.
For now, Germany is the country raising red flags.
The key sticking point is the call by German officials like Mr. Schäuble for a change in the European Union’s treaties before acceding to anything more than a network of national authorities to handle bank failures.
Treaty changes would be cumbersome and time-consuming process that could take years, if they succeeded at all.
Many other countries would resist opening up the treaties to changes at a time when Britain is already seeking modifications that many other member states oppose. Another reason to be wary of such an initiative is that Europe’s economic problems have made many citizens so disenchanted with the Union that they might very likely vote down any treaty changes.
Germany, alone, would not be able to block the proposal under the bloc’s voting rules. But major legislation in Europe usually reaches the statute books only when there is consensus.
“Germany really wants to make sure that its national authority ends up resolving German banks,” said Sony Kapoor, the managing director of Re-Define, a research group and consultancy based in London.
Other analysts sought to downplay the seriousness of German opposition, suggesting that it might be posturing for domestic political consumption before the country’s coming national elections.
“You’re likely to see a softening of the German position after the election in September,” said Holger Schmieding, the chief economist at Berenberg Bank.
“You also have to remember that Germans want rules, and the new supervisor in place,” said Mr. Schmieding, who was referring to the expected takeover by the European Central Bank of oversight of about 150 of the largest banks in the euro area during 2014. “The closer we get to that point, the more willing the Germans will be to put money on the table,” said Mr. Schmieding.
That may be necessary, well before the system is up and running.
Looming on the horizon is a series of banking stress tests — audits the central bank is expected to conduct next year to assess whether major lenders can withstand economic shocks. The tests are widely expected to reveal a clutch of previously undiagnosed problems in the banking systems of countries that could include France, Italy and Spain.
Bankers praised the proposal for seeking to simplify the handling of cross-border crises. But some immediately moved to limit the amount they would need to contribute to the shared fund. Guido Ravoet, the chief executive of the European Banking Federation, an industry group, called in a statement for limiting the fund’s size for “at least 15 years.”
Mr. Ravoet said that rules provisionally agreed to last month by European finance ministers to shift most of the losses in bank failures to creditors and investors, rather than imposing them on taxpayers, “would absorb all or most of the cost of a bank failure in most circumstances.”