EU puts financial system credibility on line in resolution talks

Efforts afoot to create new central agency

The credibility of Europe’s efforts to restore confidence in its financial system hangs in the balance as lawmakers try to broker a deal on a bank-failure authority for the 18-nation euro area.

As U.S. Treasury Secretary Jacob J. Lew tours European Union capitals to push for tougher banking regulations, negotiators in Brussels begin a sprint today to create a central agency for saving or shuttering euro-zone banks before elections in May.

When EU finance ministers ended a fractious debate and settled on a blueprint in December, European Central Bank President Mario Draghi “strongly” welcomed the plan, though it diverged broadly from the ECB’s position. The parliament’s stance is closer to the original proposal made in July by Michel Barnier, the EU’s financial-services chief. Now the two sides will try to find a compromise.

“With the political clock ticking in Brussels, and with evidence of regulatory fatigue on a number of fronts, it’s all about reaching a position that allows those concerned to claim that plans for a banking union are moving ahead, but at the same time leaving many details to be worked out over the coming months or even years,” said Richard Reid, a research fellow for finance and regulation at Scotland’s University of Dundee.

The Single Resolution Mechanism bill is part of an effort to build a banking union that would sever thefinancial links between lenders and sovereigns that fueled Europe’s debt crisis.

‘Tough’ Talks

Barnier’s proposal for a strong central authority backed by a single fund to cover resolution costs met with broad approval from the parliament and the ECB, but faced an initial barrage of German-led complaints from national governments. The final bill must be approved by the parliament and member states to take effect.

“To complete the banking union, a Single Resolution Mechanism must be finalized in the coming months,” said Arlene McCarthy, a deputy head of the European Parliament’s Economic and Monetary Affairs Committee. “Negotiations will be tough, as there are fundamental issues on who decides if a bank will be resolved and who pays for it that need to be agreed.”

As the talks begin, Lew will be pressing European officials to follow the U.S. in adopting tougher banking regulations to ensure that American financial firms aren’t put at a competitive disadvantage. His trip takes in France, Germany and Portugal.

In reaching a common position on the bank-failure plan, EU finance ministers overcame conflicts that pitted big nations against small ones, euro members against those outside the currency bloc, and Germany’s desire to shield taxpayers against ECB calls for central control.

Public Backstop

The finance chiefs pledged to create a 55 billion-euro ($75 billion) industry-financed resolution fund over the next 10 years, backed an agency to make decisions on handling failing banks and agreed on cost-sharing procedures.

Yet they postponed decisions on how they’ll jointly back up the new system, saying that a common public backstop would be developed in coming years. And they split the proposal in two, with the resolution agency created through EU legislation. Financing arrangements would be set up in a separate agreement among nations, cutting out the European Parliament.

Elisa Ferreira, who is leading the EU parliament’s negotiation team on the draft law, has said that its “a very serious possibility” that no deal will be possible on the bill, because the ministers’ plan is a “completely different” from the parliament’s.

Potential Compromises

“We should try to take the best from both texts,” said Sharon Bowles, chairwoman of the assembly’s Economic and Monetary Affairs Committee, specifying that the opinions voiced were her own, not those of the committee.

Potential compromises could include scrapping the intergovernmental treaty in favor of an alternative basis in the EU treaties, she said. Parliament should also fight for clear provisions in the law making the ECB responsible for deciding if a bank is in crisis and handing it to the resolution agency, and for a faster pooling of national funds, Bowles said.

“Given the piecemeal and fractious approach to agreeing these new resolution procedures, it is to be hoped that they are not seriously tested in the near future,” the University of Dundee’s Reid said. “Perhaps this is one reason why the policy focus has moved much more in the direction of looking at ways of supporting the provision of credit to needy parts of the economy in order to support economic recovery.”

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