Proposals for single banking resolution rest on ‘shaky foundations’

European Commission proposals for a new single banking resolution authority rest on "shaky foundations", according to German finance minister Wolfgang Schäuble.

Stepping up his government's opposition to the proposal in its current form, Mr Schäuble told the Bild tabloid he had already written to EU internal market commissioner Michel Barnier to say his proposals were "very risky".

“From a German perspective the proposals are built on shaky foundations,” he said.

“What we need now is a credible, legally sound solution. Having to close a bank is a decision with far-reaching consequences that cannot be made by Brussels alone.”

On Tuesday the commission presented its proposals for the Single Resolution Mechanism, a further pillar in Europe’s so-called “banking union” to stabilise the post-crisis financial sector.

The plan would create a new body in the European Commission with the power to decide when and how to shut struggling banks. The body with a staff of 300 would include representatives from national resolution authorities on its board and oversee a wind-up fund of up to €70 billion.

However German officials complain that, by bedding the proposals down in European common market law, Brussels is trying to establish a competence for which it has no legal entitlement.

Sooner or later this “competence hijack”, as they put it, will be challenged in court - with unpredictable consequences - by the losers of any bank wind-up.

Berlin wants bank wind-ups to be overseen by a network of national authorities until member states agree a limited treaty change to give Brussels an explicit competence in this area.

Mr Schäuble said yesterday it was “an open question” whether the proposed Brussels authority would “given their limited expertise be able to act stringently enough”.

He supported the idea of a mutualised EU bank wind-up fund but warned against expecting European taxpayers to cover the cost of struggling banks while the common fund was filled with the proceeds of bank levies.”

“We don’t want that Europe decides and the member states pay,” he said, urging responsibility and liability to remain in one hand. “That is our obligation to national parliaments.”

Mr Barnier conceded on Tuesday that it was impossible to rule out the need for further public money in future bank bail-outs, but that such a move would require national finance minister consent.

He would like single resolution mechanism in place by 2015, even if common rules will only kick in around 2018.

German politicians are anxious to keep a lid on the proposals until after September’s general election. The idea of pooling bank national funds at EU level is particularly unpopular with Germany’s regional savings banks who had little or no exposure to the financial crisis.

Yesterday Stephan Götzl, president of Germany’s regional bank association, attacked the single resolution plan and common fund as an “enabling act” - a term with historical associations to the Nazi takeover of 1933.