Europe decides Banking on Responsibility

Who pays if banks in the euro zone go bust? Faced with decisions on whether or not to share liability for each other's institutions, the countries of the euro zone have decided for a common fund but against a security net – for now.
Better together?

Joint fund yes, joint liability no: This might be the motto of a new fund for winding down failed banks in the euro zone.

After months of wrangling, the finance ministers of the 19-nation currency bloc have reached a compromise deal on just how far they want to be liable for each other's banks in the case of collapse.

For now, the countries have decided in favor of a common fund to draw on in times of need, called the Single Resolution Fund. The fund would be paid into by banks and come into play when the shareholders and creditors of a bank become financially overwhelmed by the collapse of their institution.

The fund is intended to protect governments and taxpayers from the costs of bank insolvencies – avoiding the billions of euro in bailouts that were quite common after the 2008 financial crisis.

But a great deal of time will pass before the Single Resolution Fund, the SRF, is fully operational. Banks are supposed to pay in the overall targeted volume of €55 billion ($59.1 billion) by 2024. In its first years, the financial cushion of the fund will be thin – the money set aside would hardly be enough to wind down a large financial institution. So what would have to be done if a large bank insolvency happens during the build-up phase of the fund?

After much seesawing, the finance ministers of the European Union have come up with an answer. Responsibility to pick up the tab, at least for now, will stay with the national government.

In its initial years, only a fraction of the targeted financial resources of €55 billion will be available.

That means: If the costs of liquidating a bank surpass the financial resources of the SRF, then the home country of the bank involved will be held liable. Its government would be required to issue a loan to the European fund. E.U. diplomats said this is the proposal that will most likely be agreed upon by the E.U. finance ministers at their meeting Tuesday in Brussels.

The finance ministers had originally discussed a completely different solution. The European Stability Mechanism, another pan-European bailout fund that is paid into by governments rather than banks, was supposed to establish a credit line for the bank fund. This would have guaranteed that, in an emergency, the entire sum of €55 billion would have been available to the Single Resolution Fund from the very first day.

The European solution would have corresponded to the spirit of the European banking union – an ongoing effort to level the playing field and create common rules and supervisors for all euro zone countries. A draft rule for the bank fund agreed last year by finance ministers had said: “The guaranteeing of an effective and sufficient financing of the fund is of extreme importance for the credibility of the uniform liquidation mechanism.”

Nonetheless, they have now decided upon a more modest solution. Instead of sharing the responsibility, the governments of the euro-zone countries have obligated themselves to advance the money to their banks in an emergency. For example, German financial institutions must pay about €15 billion into the SRF by 2024. If before that date a German bank should collapse, then the German federal government would have to transfer the still-owed amount as a loan to the SRF – and quickly. The talk in Brussels was of a payment deadline of four days.

Admittedly, this measure will not make the SRF fully capable of acting. In its initial years, only a fraction of the targeted financial resources of €55 billion will be available. Moreover, this will not sever the link between the insolvency risks of banks and of states in the euro zone, a connection that has repeatedly been castigated, although precisely this was the main goal of the banking union. Critics have focused on this shortcoming.

“The fact is that with regard to liquidations, the banking union has been pushed back by eight years,” said Sven Giegold, a Green Party representative to the European Parliament.

Germany's finance minister, Wolfgang Schäuble, on the other hand, considers the currently proposed course to be the correct one. It was above all Mr. Schäuble who prevented the establishment of a collective credit line from the ESM to the Single Resolution Fund. Even though a great majority of euro countries were for the measure, they couldn't overcome the opposition of Germany and Finland. Because to do that, it would have been necessary to amend the shareholders' agreement of the European Stability Mechanism, something that is only possible with the consent of all euro-zone countries.

Mr. Schäuble is willing to accept a joint credit line for winding down failed banks – if at all – only in the long term. Before it can even be considered, the banks of all euro-zone countries should have made their full payments to the liquidation fund. He also wants the euro zone to have a common financial policy that is anchored in the E.U.'s treaties. Only under these preconditions does he deem it appropriate for the euro-zone countries to jointly assume financial risks.

Germany is pursuing an even tougher line in the discussion about an E.U. deposit guarantee – another fund that would protect households that deposit money in a bank. The European Commission is scheduled to announce draft guidelines on November 24. Germany will most likely express reservations about the constitutionality of such measures. The argument: The planned pooling of the fund for guaranteeing deposits affects not only banks, but also the property of deposit holders.


Ruth Berschens is Handelsblatt's bureau chief in Frankfurt. To contact the author: [email protected]