EU resumes battle over how to impose losses at failing banks

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.

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