26th Jan 2021

Eurozone bailout fund to prop up banks from 2014

  • Dijsselbloem (r) - the agreement represents a 'building block of banking union' (Photo: consilium.europa.eu)

The eurozone's bailout fund will be able to directly prop up weak banks from next year, after ministers reached agreement on Thursday night (20 June)

Under the deal agreed by the bloc's finance ministers in Luxembourg, €60 billion out of the European Stability Mechanism's €500 billion lending capacity will be allocated to bank recapitalization.

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Klaus Regling, the German managing director of the ESM, indicated that the direct recap instrument would be ready in the second quarter of 2014, in time for the next round of 'stress tests' on Europe's banks and before the European Central Bank assumes its new duties as supervisor of the eurozone banking sector. He described the €60 billion as "more than sufficient".

Member states seeking to utilise the new instrument would have to stump up 20 percent of the recapitalization costs. Governments would also be required to inject extra funds to bring banks up to the 4.5 percent minimum capital buffer.

The formal guidelines for the recap instrument will be drawn up on the basis of the rules on bank recovery and resolution currently under discussion with ministers and MEPs.

Ministers agreed "one of the building blocks of banking union," said Jeroen Dijsselbloem, who chairs the Eurogroup, at the press conference following the talks.

He also left open the prospect of the eurozone's four bailout countries being allowed to use the new facility.

"It will have to be decided case-by-case and by mutual agreement," he said, adding that "it's up to the member states to apply for it."

The agreement brings a close to a year of tortuous negotiations on one of the main tools in breaking the links between indebted banks and governments. Ireland and Spain were pushed to the point of bankruptcy as a result of guaranteeing the debts accrued by their private banks.

German finance minister, Wolfgang Schaueble, who had led resistance to allowing the bailout fund to directly support banks, called the move an "important step on the way to the banking union by agreeing on the main points for a future regime for direct bank recapitalization."

For his part, EU economic affairs commissioner Olli Rehn welcomed what he described as "serious progress on direct bank recap".

"We have taken another step to…break the vicious link between banks and sovereigns by diluting the link between them," he added.

Ministers also backed Latvia's bid to become the eighteenth member of the single currency in January 2014, with EU leaders expected to confirm the decision at next week's summit.

EU ministers agree rules on bank collapses

Bank shareholders and creditors will be first in line to suffer losses if their bank gets into difficulties, according to draft rules agreed by ministers Thursday.

Budget deal struck, with Hungary threat still hanging

Ultimately, the European Parliament managed to squeeze an extra €16bn in total - which will be financed with competition fines the EU Commission hands out over the next seven years, plus reallocations within the budget.

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