Wednesday

20th Jun 2018

EU officials want governments to share bank bailout pain

  • The ESM is expected to directly recapitalise banks (Photo: snorski)

National governments should pay their own contribution to recapitalize ailing banks alongside funding from the eurozone's bail-out fund, according to a paper by EU officials.

Eurozone finance ministers are expected to discuss the plans when they convene on Monday (21 January) for their first Eurogroup meeting of 2013.

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For their part, officials in the EU Council in an informal "Issues Note" leaked on Friday by the Wall Street Journal, propose that banks should be eligible for direct support only if national governments are unable to put up the cash themselves or if their failure is of systemic importance to either the member state or the eurozone as a whole.

Banks would also be eligible if they would otherwise breach rules on capital requirements requiring them to hold core capital worth at least 4.5 percent of the total value of financial instruments on their balance sheets.

But the officials also said that national governments should make a contribution to bank bailouts, with the paper noting: "It is suggested to have a contribution from the member state where the rescued institution is headquartered, so as to take into account the existence of legacy assets."

In a bid to make sure national governments shoulder the burden of bank losses, it adds that member states should "make a capital contribution or provide a loss guarantee equivalent to a certain percentage of the amount injected by the ESM [the EU's bailout fund]."

The programme forms a key part of the legal framework of a comprehensive banking union for the eurozone.

Ministers will on Monday also discuss the state of negotiations on two regulations to establish a single supervisory mechanism, with the European Central Bank to co-ordinate banking supervision and have the powers to directly intervene in the functioning of the bloc's most systemically important institutions.

Talks on the supervisory regime have progressed slower than expected.

Ministers and MEPs missed their self-imposed December 2012 deadline to sign off on the legislation, which is now expected to come into force in early 2014.

They are likely to be followed later this year by EU legislation to put in place a common resolution scheme to wind up insolvent banks and harmonisation of national rules guaranteeing savers' bank deposits.

In June 2012, EU lawmakers promised to take measures to sever the link between heavily-indebted governments and banks by allowing the ESM to offer direct aid to banks, ending the vicious cycle of governments driving themselves into debt by borrowing billions to prop up their banks themselves.

Last year, Spain became the first EU country to request emergency funds to directly prop up its insolvent banking sector, with the centre-right government of Mariano Rajoy requesting €39.5 billion for Spanish banks in December.

Germany, Finland and the Netherlands are reluctant to pave the way for the ESM to assume complete liability for bank losses, however.

Meanwhile, some officials worry that bank recapitalization would severely deplete the size of the fund, potentially making it harder to finance any future state bail-outs.

The initial blueprint of the €500 billion bail-out fund in early 2011 said that it would only provide emergency support to national governments.

ESM bank bailouts will not happen soon, says Schaeuble

German finance minister Wolfgang Schaeuble Monday reiterated that no bank recapitalisation could take place until the EU's planned banking union is up and running but admitted "Spain can't wait that long".

Greek bailout exit takes shape

At a meeting next week, eurozone finance ministers and the IMF are expected to agree on new cash, debt relief measures, and a monitoring mechanism to ensure that Greece can live without international aid for the first time since 2010.

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