European finance ministers meet this evening in Brussels in an effort to hammer out agreement on bank resolution legislation ahead of tomorrow’s summit of EU leaders.
Talks on the new banking resolution and recovering directive –a key strand of banking union that will dictate how banks will be wound-down in future – finished without agreement on Saturday morning in Luxembourg, prompting Minister for Finance Michael Noonan to call a second meeting for tomorrow.
Irish officials have been holding bilateral negotiations with key member states over the past few days in Brussels in an effort to reach consensus ahead of today’s meetings. However, key issues still remain, with member states divided on the question of how much flexibility can be afforded in implementing the rules. An Irish presidency spokeswoman said Mr Noonan would aim to “bridge the remaining divergences between member states” and reach agreement on new EU bank resolution rules at tonight’s meeting.
Greater flexibility
While Germany is in favour of strict streamlining of rules, a number of countries including the UK, Sweden and France are calling for greater flexibility in implementing the new EU rules. This could lead to some countries using some elements of taxpayer "bailouts" in the event of a bank wind-down or recovery, in addition to the "bail-in" measures under discussion, which oblige banks to absorb losses from their own resources rather than those of the state. The proposed move towards a "bail-in" model is part of a plan to shift the cost of future bank wind-downs away from the taxpayer and on to private creditors.
Meanwhile, deputy president of the Bundesbank, Sabine Lautenschläger, indicated the German central bank's opposition to any European recapitalisation of Irish banks stemming from losses on property assets yesterday in Dublin.
Her comments come on the back of last week’s decision by euro zone finance ministers to consider retroactive application of the euro zone’s bailout fund, the ESM, for direct bank recapitalisation. However, the decision on the use of ESM funds to recapitalise banks will be made by euro zone governments, not their central banks.
Discussing the legacy risks of euro zone banks at the Institute of International and European Affairs, she said that “as these risks were created in the past, under the responsibility of individual member states, they should be borne in a national context, too”.
Stress tests will be conducted next year on all euro zone banks. There is a rising expectation that the losses on mortgages and businesses loans in Irish banks will exceed the worst-case scenario set out under the terms the 2010 EU-IMF bailout. If this turns out to be the case, the banks will require further recapitalisation via an infusion of funds or the bailing in of creditors.
Ms Lautenschläger also said that the Bundesbank favours extensive changes to the EU’s founding treaties so that the various components of the banking union being constructed in the euro zone are placed on a firm legal foundation. This is also a prerogative of member state governments, not central banks.
There has been considerable irritation in many euro zone capitals over the conduct of the Bundesbank during the euro crisis. Last year it went against other euro zone central banks and the German government in opposing the ECB’s plan to buy the bonds of weaker member states.
