Thursday

7th Jul 2022

Germany budging on banking union

  • ECB chief Draghi and Germany's Merkel will discuss the upcoming banking union at the EU summit (Photo: consilium.europa.eu)

After having opposed for months a so-called resolution mechanism for failing eurozone banks, Germany is budging on the issue and wants a deal by the end of the year.

The European Commission proposal for an authority having the power to tell banks to shut down or to draw money from shareholders, creditors and ultimately taxpayers had been flatly rejected by the German government earlier this year.

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But at an EU summit on Thursday-Friday (24-25 October) in Brussels, Chancellor Angela Merkel is set to have a "constructive" stance on the matter and seek a deal among member states by the end of the year, a senior German official said on the eve of the meeting.

The German chancellery and the finance ministry are already "working on solutions" on the most controversial points of the proposal, the official said.

Under a possible compromise, the Single Resolution Mechanism (SRM) would only extend over the 130 largest banks in the eurozone and national parliaments would have to approve any use of public money in helping out troubled banks - a constitutional requirement in Germany.

Also key to German approval is a clear pecking order of shareholders and creditors who have to step in when a bank is wound down.

"The commission has proposed a fund to be set up from the banks' own contributions, but it will take 10-15 years until it will be available, the official said.

This means that in the next 3-5 years we will not have a sufficiently funded pot. Instead, we will have again and again the question of using public money. And the European Commission has not included an answer to this question in its proposal."

Limiting the SRM to the 130 largest banks would be the preferred German option because it would create a "certain symmetry" to the single banking supervisor being currently set up within the European Central Bank (ECB), whose remit is also on these big banks only.

On Wednesday, the ECB published its plan on how it will assess the balance sheets of these banks - a precondition for it to take on the supervisory role.

Key to this exercise is for banks to have eight percent capital - a higher-than expected requirement.

If capital shortfalls are identified, banks will be required to make up for them, the ECB said. Draghi has said a "public backstop" must also be available for this exercise.

A provisional list of banks to be reviewed includes 24 German lenders - including six of the Landesbanken that were bailed out in 2008. French, Italian, Dutch, Spanish, Irish, Portuguese, Cypriot and Greek banks are also on the list.

Shares in eurozone banks fell by 2.5 percent on Wednesday, reflecting investors' concerns that these tests will pressure banks to tighten their lending. Spain's Bankia falling by five percent on the markets and Germany's Commerzbank by three percent.

The German financial supervisor Bafin said the country's banks were "already intensively preparing for the comprehensive assessment."

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