5th Dec 2023

Ministers try to bridge divide on bank rescue funds

  • Cypriot bank: Ministers want to avoid seizing savers' money, as in the Cypriot bailout (Photo: truthpaint)

EU finance ministers will meet in Luxembourg on Friday (21 June) aiming to strike a deal on a regime to wind down failing banks, in the latest attempt by politicians to break the so-called "doom loop" between indebted banks and sovereigns.

The bank recovery and resolution directive sets out a hierarchy of shareholders and creditors who would be 'bailed in' to bear losses if a bank got into serious difficulties, leaving savers as the last in line to lose their money.

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By forcing shareholders to pay for a bank collapse, ministers hope to avoid a repeat of the multi-billion euro taxpayer funded bailouts following the 2008-9 financial crisis.

The directive, tabled by the commission in June 2012, was widely seen as a precursor for the keenly awaited single resolution mechanism (SRM) for the eurozone, expected to be proposed in the coming weeks by the EU executive.

The commission, with the support of the European Central Bank and a group of member states led by France, is keen to set up a single authority to deal with resolution alongside a common bank resolution fund for the eurozone.

However, with ministers still yet to agree on a negotiating mandate to enter talks with the European Parliament, the two dossiers are expected to overlap, potentially causing tensions with countries outside the single currency.

Speaking on Wednesday (19 June), Irish presidency sources indicated that ministers should prepare themselves for a long evening and a possible agreement late on Friday night. "We're probably looking at a 1 or 2am finish," said one.

The dossier also became a high political priority following the clumsily-agreed bailout for Cyprus in April which included a €7 billion raid on savers with deposits worth over €100,000.

For his part, Gunnar Hokmark, the Swedish centre-right MEP tasked with piloting the legislation through parliament, has stated that his aim was to "achieve as much legal clarity as possible" adding that "what happened in Cyprus shall not happen again if this legislation is implemented".

More controversially, the EU executive and MEPs want all countries to set up national resolution funds worth up to 1 percent of national bank deposits, paid for by the banks, to cover the costs of a struggling institution.

The UK is alone in insisting on an exemption from setting up its own fund, arguing that it already collects £2.5 billion each year from a government bank levy started in 2010.

The UK, whose banking sector is dominated by a handful of mega-banks including the likes of Barclays, Lloyd's and HSBC, also claims that a resolution fund would not be big enough to prop up any of its major banks.

Speaking with this website, an EU diplomatic source played down the prospect of a battle between the UK and other ministers. "The UK has its own bank levy and we will work our way around this," he said.

Ministers are also anxious to include a flexibility clause allowing them to take account of the overall stability of their banks, allowing them to prevent the collapse of one bank causing a domino effect.

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