23 October 2013

Single Resolution Mechanism - what the papers say

Scandinavia's banks are contesting a plan by the EBA that requires lenders to adopt a uniform approach when calculating capital buffers; the UK and Sweden are seeking EU budget safeguards; Merkel could be about to agree to the SRM - under three conditions.

Bloomberg reports that EBA Chairman Andrea Enria said last month that there were no "rational justifications" behind the different methodologies now used as the London-based authority pursues a harmonised model. Yet bank groups in Sweden, Finland, Denmark and Norway say the EBA’s approach ignores earlier rules on how to measure reserves.

In Finland, the Nordic region’s only euro member, banks would lose about 1 percentage point from their capital ratios if calculations are harmonised as the EBA envisions, said Elina Salminen, an analyst at the Helsinki-based Federation of Finnish Financial Services. Scandinavia’s banks, among the best-capitalised in Europe, argue the EBA’s approach doesn’t reflect the safety of their mortgage assets.

Scandinavia’s bankers associations are now appealing the EBA’s decision. The associations, backed by the Brussels-based European Banking Federation, have urged the European Commission to reject the EBA’s method, according to a letter dated last month. The commission may decide as early as this week.

European regulators first sought to impose a floor on capital levels in 2007, after Basel II rules gave banks more freedom to assign risk weights to their assets. Five years later, the EBA said it found "serious discrepancies" in national interpretations of the floor with "deeply unsettling" results. Svenska Handelsbanken AB, Swedbank AB, SEB AB, Nordea and Danske have Tier 1 capital ratios relative to their risk-weighted assets that are among the world’s highest. Handelsbanken is the best-capitalised major bank in the EU.

The ECB has also specified in an emailed statement, according to Bloomberg, that it will use stricter rules when stress testing banks’ balance sheets next year than it will to study their assets, as it seeks to prove its credentials as the region’s financial supervisor.

In a separate article, Bloomberg also notes that the UK and Sweden are seeking safeguards to ensure that the EU budget is not used to cover any legal costs related to the Commission’s role in any single eurozone bank resolution mechanism. 

The draft law to set up the resolution mechanism should make it clear that "costs in connection with judicial proceedings concerning acts or omissions of the commission in the performance of its tasks" as the ultimate decision-maker in the resolution system "shall not engage the budgetary liability of the member states or the union", according to the joint British-Swedish paper that was discussed last week by national officials in Brussels.

The Single Resolution Mechanism proposal is part of a euro area effort to break the financial links between sovereigns and banks by centralising oversight and crisis management of failing lenders. The blueprint, presented by EU financial-services chief Michel Barnier in July, has met with a barrage of complaints from governments, especially Germany, though nations have said that they will target a deal on the plans by year-end.

The Frankfurter Allgemeine Zeitung and the Süddeutsche Zeitung report Angela Merkel to have said that Germany could agree to a single bank resolution mechanism with a combined fund if it covers only the 130 largest eurozone banks and requires that bank investors have to share the burden of any bailout, as well as any bailout having to be approved by national parliaments. The new proposal would grant the Federal Parliament a say in the settlement of ailing banks and establish high hurdles for accessing taxpayers' money. Furthermore, the German savings and cooperative banks would not be affected. At the same time, the federal government would respond to the urgent desire of its European partners, who are insisting on a single resolution mechanism to be established quickly.

However, El País reports that, in a letter to ECB President Mario Draghi, EU Competition Commissioner Joaquín Almunia has rejected the request to soften bail-in rules for eurozone banks, adding that any decision is to be made "on a case-by-case basis" and only after the ECB’s asset quality review is finished.