EU finance ministers struggle to agree on bank-failure plan

European Union finance ministers struggled to advance a bank-failure plan for the euro area today, hampered by the interregnum in Berlin and persistent divisions on basic points.

Ministers will be pressed to meet a year-end deadline to broker an accord after cutting short talks in Brussels today.

The bloc’s 28 nations are split on who should be the ultimate decision-maker in the planned Single Resolution Mechanism, whether it should be backed by a central fund and which banks should be covered.

Germany reiterated its opposition to key planks of the blueprint proposed by the European Commission.

Today's discussion "proved that today we still do not have agreement, so it was absolutely senseless to sit overnight, because there's still no way to get this final agreement," said finance minister Rimantas Sadzius of Lithuania, which holds the EU's rotating presidency.

The Single Resolution Mechanism is part of a euro-area effort to break the financial links between sovereigns and banks by centralizing oversight and crisis management of failing lenders.

The proposal, presented in July by Michel Barnier, the EU's financial services chief, initially met with a barrage of complaints from governments.

EU leaders nevertheless reaffirmed last month that nations should agree on a common stance by the end of this year and called the plan is an essential complement to European Central Bank supervision of euro-area lenders, which begins in a year.

Common fund

German finance minister Wolfgang Schaeuble called on his colleagues to rein in their ambitions for the SRM, including the proposed central fund.

He has said Mr Barnier’s centralized blueprint should be scrapped in favour of a network of national authorities without a common fund, on the basis that further steps can only be taken once changes are made to the EU’s basic treaties.

Today’s debate “showed that of course we can’t get a perfect solution on the basis of current treaties,” Mr Schaeuble said.

He noted a “deepened understanding” among his colleagues that a sound legal basis for any resolution system “is necessary not only from a German point of view.”

German chancellor Angela Merkel's Christian Democratic bloc is in talks with the Social Democrats to form a so-called grand coalition government, almost two months after Ms Merkel's party won the largest share of the vote in parliamentary elections.

‘No government’

"As long as there is no government in Germany I don't see progress," Dutch finance minister Jeroen Dijsselbloem said.

The barriers in the way of making progress at today’s gathering led Mr Sadzius to scale back plans for a series of one- on-one meetings with finance ministers, shortening the meeting by several hours. A planned dinner was also cancelled.

Mr Sadzius said that he would seek a political deal on the plans at the ministers’ next meeting on December 10th.

Minister for Finance Michael Noonan raised the prospect that finance ministers may have to convene again after that meeting to get a deal.

“It seemed to me that there’s a lot of goodwill to get decisions taken in December, and it’ll be up now to the Lithuanian presidency to do that at the regular meeting or to do it at a special meeting,” Mr Noonan said.

Outstanding points in the talks include whether the SRM should cover all banks and whether the fund should be financed by “a European-wide levy on the financial institutions or would that be supported by national levies,” Mr Noonan said.

‘Strong and independent’

There are also splits about the governance of the system and what backstops it should have, he said.

EU leaders set the year-end deadline with the intention that this would leave time for a final agreement on the legislation with the European Parliament before the assembly shuts down before elections in May.

The ECB reiterated last week that it wants a “strong and independent” European resolution mechanism in place as soon as possible after it begins oversight, adding to the pressure on governments.

"It is absolutely necessary that we reach agreement by the end of the year,'' ECB executive board member Joerg Asmussen said today.

While Mr Schaeuble indicated that Germany's position was winning converts, Pierre Moscovici, France's finance minister, said support was mounting for a bank-failure system along the lines proposed by Mr Barnier.

‘Wide banking union’

“This is a day that is finishing well and not only because it is finishing early,” Mr Moscovici said after the talks concluded.

“A certain number of principles are emerging around the commission’s proposal: the idea of a banking union that covers all banks, which is to say a wide banking union; a mechanism that can be flexible, simple and efficient, that can be pragmatic and rapid; and agreement on backstops” including the possibility of tapping the European Stability Mechanism, the euro area’s firewall fund, Mr Moscovici said.

Danish economy minister Margrethe Vestager also indicted that Germany may join an emerging EU consensus on the need for the system to be backed by a central fund.

“I think it gets increasingly clear that the financial sectors will establish one fund,” Ms Vestager told Danish news agency Ritzau.

“I find that very healthy, as that means there are broader shoulders to carry if there is a problem in one place.”

‘Clear choice’

German resistance to Mr Barnier’s blueprint has also focused on his proposal that the commission, the EU’s executive arm, should be the key decision maker.

Mr Schaeuble has instead advocated a system based around the Council of the European Union, an EU institution that represents national governments.

Mr Barnier told ministers that while he’s open to compromise, they should make a “clear choice” and avoid hybrid solutions.

In addition to the talks on the resolution mechanism, ministers agreed on guidance for banks that are deemed to have insufficient capital as a result of ECB-led asset-quality reviews and stress tests to be carried out next year.

Banks should first seek to raise capital themselves, the ministers said. If that fails they can turn to national backstops, with European-level assistance a last resort, according to the statement.

“At the euro-area level, ESM instruments may be used in the appropriate sequencing, according to their respective agreed rules and requirements,” the ministers said.

Bloomberg