European Union finance ministers descended on Brussels, aiming to break a deadlock on rules for assigning losses at failing banks that doomed overnight talks last week.
Irish Finance Minister Michael Noonan, chairing his final meeting of Ireland’s six-month EU presidency today, held preliminary talks this afternoon in a bid to get a deal that he says is essential for keeping the EU’s crisis-fighting strategy on track. All 27 EU finance chiefs are scheduled to convene at about 6 p.m. in the Belgian capital.
“It’ll be slow -- bring your sleeping bag,” Noonan told reporters on June 24, after he spoke in the European Parliament. If ministers again fail to reach a deal, their timeline for strengthening central control of banks will be “off-kilter,” he said.
Talks last week foundered on the question of which creditors face writedowns when banks fail. Some countries demanded more flexibility for national authorities, while others sought strict rules across all 27 EU nations. Ministers considered several ways to set thresholds for losses that would need to be assigned via strict formulas before national discretion would be allowed.
An updated plan, circulated by Ireland to nations today, would hand regulators different degrees of flexibility depending on how they plug gaps that arise when some creditors are exempted from writedowns.
“We need a clear liability cascade: first the shareholders, then the various bondholders, then the depositors -- not the insured deposits, which have always been excluded by European law -- then the member state concerned, and if that member state can’t do it, then also the European rescue fund,” German Finance Minister Wolfgang Schaeuble said on Deutschlandfunk radio today.
“What we saw in 2008, that the big ones make billions in profit and the community of taxpayers bears the losses; that’s something we no longer want to have,” Schaeuble said.
Under the revised Irish plan, regulators would have more freedom to grant carve-outs from writedowns if the burden is shifted to other private creditors, rather than to national resolution funds.
Flexibility could be applied in cases where writedowns could threaten financial stability, or cause “value destruction that would leave other creditors worse off,” according to the proposal, obtained by Bloomberg News.
Levies on Banks
Nations would have to work within certain limits if they chose to tap resolution funds to make up the shortfalls caused by exempting some private creditors.
These funds, financed by levies on the banks, couldn’t be used until 8% of the distressed bank’s liabilities had been wiped out, according to the document. Limits would also be placed on how much support these funds could provide.
The plan also stipulates that nations can use public money, including potentially the European Stability Mechanism, to plug gaps caused by creditor exemptions if the limits on the use of resolution funds have been reached.
The EU needs an approach “that allows some but limited flexibility to ensure financial stability, while still providing an ex-ante pecking order and clear rules,” Joerg Asmussen, a member of the European Central Bank’s executive board, said in a speech today in Paris.
“Global investors need certainty about the rules of the game in Europe,” he said.
Cycle of Contagion
After more than three years of crisis and bailouts in five euro-area nations, EU leaders have pursued the banking union as a way to reassure investors that they can break the cycle of contagion between banks and sovereign debt. The ECB will take over bank oversight in the euro zone next year, and the strategy calls for bank resolution procedures to be in place along with national backstops.
Leaders gathering in Brussels tomorrow may downplay the pace of banking reforms. Draft conclusions for the summit affirm that “it is imperative to break the vicious circle between banks and sovereigns,” without setting deadlines for further action.
“This is a tough negotiating chapter,” German Chancellor Angela Merkel said on June 24. Europe’s priority should be to “become more competitive,” not just increase its oversight of banks, she said.
Denmark, one of the few European nations that has allowed some of its banks to fail, is pushing hard for strict rules in all 27 countries.
“Beyond our main point that banks will have to pay for themselves, we believe rules must apply for everybody and competition must be equal,” Danish Economy Minister Margrethe Vestager said on June 24.
Swedish Finance Minister Anders Borg countered that nations, especially those outside the euro zone, need to be able to step in when financial stability concerns become paramount. “Rigid” rules would increase credit risks and imperil economic recovery, he said yesterday.
“We cannot go into a banking resolution with a straitjacket on,” he said. “Dealing with crisis, you need a certain degree of flexibility.”
ECB President Mario Draghi said in Paris today that “it’s very important that whatever regulation finally comes out is mindful of creating a situation of order.”