European finance ministers were close to agreement on a single authority to wind-down banks in Brussels last night, although concerns remained about the workability of the proposals, with European Central Bank vice-president Vitor Constancio questioning its credibility.
The development came as the US Federal Reserve took the first step away from its historic third round of asset purchases with the decision to taper its monthly buying from $85 billion to $75 billion. It marks the moment when monetary stimulus finally passed its peak almost five years after a crisis that shook the foundations of the global economy.
Starting in January, the Fed will taper its treasury purchases by $5 billion to $40 billion a month, and its mortgage-backed securities purchases by $5 billion to $35 billion a month.
The Fed also reinforced its forward guidance of low interest rates with a statement that interest rates are likely to stay close to zero “well past the time that the unemployment rate declines below 6.5 per cent”.
S&P rebound
The S&P 500 rebounded from modest losses and rose as much as 0.8 per cent as investors focused on guidance from the central bank that low policy rates will remain in place for a considerable period of time after asset purchases end and the economy strengthens.
EU leaders will have been keeping a close eye on the Federal Reserve’s signals as they prepared to gather in the Belgian capital this morning for a two-day summit. Finance ministers were racing to reach a “general approach” last night to prevent technical discussions on bank rescues impinging on the first day of the summit, which is expected to deal with defence, migration, as well as banking union.
In a boost to yesterday’s meeting, the 17-strong group of euro zone finance ministers agreed in the early hours of Wednesday on a “backstop” to deal with problem banks in the event that they would need more capital while Europe’s €55 billion resolution fund is being built up.
However, under the agreement, the backstop “will be fully operational at the latest after 10 years”, raising the possibility that it may not be fully in place for another decade. While the backstop will “facilitate borrowings” by the main single resolution fund, the banking sector “will ultimately be liable for repayment by means of levies in all participating member states, including ex post”, the agreement states.
Minister for Finance Michael Noonan yesterday indicated that the provision whereby banks, and not sovereigns, would pay for any fund was of crucial concern. But ECB vice-president Mr Constancio urged finance ministers to move further in terms of the backstop's ability to borrow emergency funding on the markets, perhaps through government guarantees.
According to the draft accord, the euro zone’s rescue fund, the ESM, could be used in the transition phase “in line with agreed procedures” while national sources, backed by bank levies could also contribute.
However, German finance minister Wolfgang Schäuble suggested no money from the ESM fund would be used to finance banks directly. “The only way to the ESM is through the nation states,” he said, suggesting ESM money would only be available via a structured bailout programme with the ESM.
Meanwhile Mr Constancio warned the gathering of finance ministers that the new authority must be able to make a decision on a bank restructuring within 24 hours.
“If that is not there, we fear that markets will find the process too complex and it will not be totally credible that it can work in certain situations with the speed that is required,” he said.
German demands
His comments were echoed by Michel Barnier, the commissioner behind the initial commission proposal on which is now likely to be significantly altered to meet German demands.(Additional reporting, Copyright The Financial Times Limited 2013)
