Finance ministers fail to agree on bank resolution authority for EU

SUZANNE LYNCH

European finance ministers may schedule an extra meeting before Christmas to decide on the much-disputed single resolution mechanism, Minister for Finance Michael Noonan said yesterday, amid divisions between member states.

Finance ministers yesterday agreed on a “backstop” to deal with any problems in the banking sector revealed by next year’s stress tests, the results of which will be known in autumn.

But negotiations on a single resolution authority that will have the power to wind down banks ended without agreement in Brussels, with signs no decision will be made until a German government is found.

Bail-in hierarchy
In a statement yesterday, European finance ministers outlined a hierarchy of bail-in that would be triggered if a bank needs more capital. The euro zone's European Stability Mechanism fund – jointly funded by countries – would contribute only in the final instance after full bail-in rules are applied.

This means private markets will first be tapped, before junior classes of bondholders and shareholders, and national authorities. Only as a last recourse will the ESM be activated.

Divisions continued over the establishment of a single resolution authority to wind down banks. German officials said their concerns about bank resolution proposals should not be interpreted as foot-dragging, despite fears over the legal footing of a single resolution fund.

“It’s not disputed in principle that we need a European fund,” German finance minister Wolfgang Schäuble told reporters. “A fund needs a levy” on banks, “but the levy needs a clear legal basis. There are different opinions on that, but if you want a safe legal basis, you’d better take the safe route.”

The European Commission argues the legal basis is sound, under article 114 of the European treaties. Germany has dismissed this as a competence grab over financial affairs – to date the preserve of member states – and questioned the soundness of framing the resolution mechanism as a single market issue. The European Central Bank backed the commission's position last week.

Iron-clad footing
As an alternative, Germany has proposed using article 352 as a legal basis for bank resolution. This article allows a unanimous council vote open the door to an action, such as bank resolution, defined as being an objective of the treaties but not yet permitted by them. This would require the involvement of the commission and the consent of the European Parliament. If this route is not taken, Berlin proposes a network of bank resolution mechanisms until a treaty change to create an iron-clad legal basis.

“If one thing is clear now, there will be legal challenges to this mechanism as we’re dealing with huge sums of money,” said a senior German source. “That’s why a solution has to be legally watertight.”

Mr Noonan declined to be drawn on Ireland’s preference for whether the mechanism’s authority should lie with the commission or member states. However, he said Ireland was interested in the composition of the board of the authority.