The European Central Bank clashed with Germany over how the European Union will handle struggling banks and whether to create a common agency and fund to manage failures.
ECB Executive Board member Joerg Asmussen called for creating a central agency and an industry-funded common backstop for handling failing banks by “the summer of next year,” when the ECB takes up new supervisory duties. He set out the central bank’s position before EU finance chiefs met in Brussels today.
In a public debate during the meeting, Finance Minister Wolfgang Schaeuble held to Germany’s view that the EU shouldn’t try to create a single resolution agency without amending current treaties.
EU leaders began work on a banking union last year to break the cycle of contagion between nations and their banks that has plagued the euro area since the region’s financial crisis emerged in Greece in 2009. They started by giving the ECB oversight powers, and committed to accompany this with a single “mechanism” for handling bank failures.
The ministers today also signaled a growing willingness to give preference to depositors when assigning losses, putting senior bondholders and other unsecured creditors more squarely in the firing line. Germany and the Netherlands expressed concern that this move would increase bank funding costs.
“If there would be a broad consensus for a compromise, we could compromise,” Schaeuble said. At the same time, he and Dutch Finance Minister Jeroen Dijsselbloem said they’d prefer to have no hierarchy among unsecured creditors.
Asmussen endorsed the emerging consensus on depositor preference as part of so-called bail-in rules. “The pecking order would first write down shareholders, subsequently bail in junior creditors, then senior unsecured creditors and only if necessary and as a last resort uninsured depositors,” he said.
Ministers sparred over the impact of the new writedown rules. Dijsselbloem expressed concern that banks’ funding costs would rise, while U.K. Chancellor of the Exchequer George Osborne said depositor preference could unfairly give shell companies priority over pension managers.
Spanish Economy Minister Luis de Guindos countered that retail accounts covered by EU guarantees, which protect deposits of as much as 100,000 euros, would suffer if uninsured depositors face losses whenever a bank runs into trouble.