Frankfurt - European Central Bank (ECB) president Mario Draghi put his weight behind an EU banking union, or banking oversight agency, during a trip to Berlin yesterday, two days after Germany led an attack on a proposal to centralise control of failing lenders.
German Finance Minister Wolfgang Schaeuble sought to keep responsibility for failing banks in national hands during two days of meetings last week in Vilnius, Lithuania.
He led a chorus of dissent against the European Commission’s plan to create a e55 billion (R718bn) common fund for resolution costs and its intention to give itself the final say over when to close banks.
If Germany derails momentum towards a year-end deal on a single resolution mechanism, it may imperil efforts to restore confidence in the euro zone.
German media company Deutsche Welle explains that the first pillar of the banking union is oversight of EU banks. The second pillar – joint liquidation of bankrupt banks – is not expected to be fully operative until 2018.
Draghi said the EU needed to press ahead.
“Banking union should help speed up the repair of banks – that is if, as I hope, we end up with a strong single resolution mechanism,” Draghi said yesterday. “We need a mechanism that allows non-viable banks to be wound down without financial stability risks, as we see in the US.”
If the plan does not move forward quickly, the ECB will not be able to count on cross-border backstops if it encounters problems at euro zone banks. The ECB is scheduled to begin supervising lenders as soon as October next year, forcing the EU to grapple with who should decide when to close a bank and who will pay for it.
ECB executive board member Yves Mersch said in Dubai yesterday that the banking union was the “most immediate concern”. The ECB had started preparatory work on a review of banks’ balance sheets and would provide a proposal for the assessment in coming weeks, he said.
Schaeuble said the proposal by the European Commission must be overhauled because it was on shaky legal ground and could endanger national control of budgets. In Vilnius, the German was joined by critics from Sweden to Slovakia.
At the same time, finance ministers renewed pledges to strive for a deal quickly so financial markets will not lose confidence that the currency zone is overcoming its crisis.
Schaeuble said: “The path that the commission has proposed towards a resolution mechanism is a rocky one.
“There can be no doubt about it: we need to be on a legally certain foundation.”
The new resolution authority plus ECB oversight form the core of an effort to create banking union, which would sever the link between bank and sovereign debt.
The commission’s strategy was proposed by EU financial services chief Michel Barnier. Objections include resistance to the planned common resolution fund and the scope of the system. Nations also voiced scepticism about expanded powers for the Brussels-based commission.
While defending the core of his single resolution mechanism, Barnier said he could contemplate limiting the new authority to lenders that had cross-border operations.
He also said the commission was not wedded to being the chief decision-maker in the resolution system and would welcome a discussion on alternatives. The commission put itself forward for the role because of its reading of the bloc’s treaties, Barnier said.
Sweden’s finance minister, Anders Borg, echoed the concerns of a number of his colleagues when he said handing the commission the power to shut down banks alongside its existing role as the bloc’s state-aid enforcer was a “conflict of interest”. – Bloomberg