While the basic parameters are likely to survive in a final deal, several countries raised strong objections to Berlin-backed conditions that slowly phase in a single resolution fund – and give big countries a greater say on when it can be used.
Germany gave ground to accept the eventual establishment of a €55 billion single resolution fund in a decade’s time, paid for by an industry levy. During a transition of up to 10 years, the system would be based on a network of national resolution funds, with an intergovernmental treaty defining how costs can be shared.
Rules to impose hits on senior bondholders in failing banks are also brought forward from 2018 to 2016, a key German demand to ensure there is likely to be a smaller capital gap for rescue funds to cover.
The details of how this system of funds operates marks the biggest point of friction among Member States.
In the compromise, big countries are given greater voting power to block the release of common resolution funds; almost no finance ministers spoke in favour of the voting arrangement. The requirement for a two-thirds majority, based on the European Central Bank capital key, would for instance give Germany, the Netherlands and Finland a blocking minority.
Ministers will also need to resolve the thorny issue of a backstop for the fund. Pierre Moscovici, French finance minister, made clear that Germany was “still opposed” to allowing the eurozone’s €500 billion rescue fund, the European Stability Mechanism, offer a credit line during the transition.
While the use of an intergovernmental treaty was critical to addressing Germany’s legal concerns on the original proposal, it potentially creates problems when negotiations begin on final legislation with the European parliament, which dislikes pacts outside existing EU treaties. “I can imagine the Parliament will not be enthusiastic about such a situation and neither is the Commission", said Mr Barnier. “But a compromise must be found.”
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On its Brussels Blog, the FT leaked the SRM's Terms of Reference (view), which include some details that are new – but have already raised objections in certain quarters.
The first new measure is a provision that would require a two-thirds majority of the board of the resolution authority to approve any large-scale use of bailout funds – defined as more than 20 per cent of the fund’s total cash holdings. But it would not be one country, one vote. Instead, votes would be weighted by what’s known as the "ECB capital key", which essentially means the largest countries get the most say. "If you do the math", says the FT article, "a small group of German-led countries (such as Germany, Finland and the Netherlands) could therefore block common funds being used to wind-down or recapitalise a collapsing bank".
The other telling thing in the draft: there is no mention of the European Stability Mechanism.
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On 6 December, the FT had reported that Germany had dropped its objection to Brussels becoming the main authority for winding up eurozone banks, paving the way for a European Banking Union that would still stop short of automatically sharing the costs of a rescue. Wolfgang Schäuble's shift is a breakthrough that will probably frame a compromise to give the European Commission power to close centrally supervised banks – as long as no public money or significant resolution funding is required.
Talks on the resolution reforms were deadlocked for months, mainly because of Germany’s objections. On Friday, Mr Schäuble called Michel Barnier and the heavyweights of eurozone decision making – the finance ministers of France, Netherlands, Spain and Italy – to an informal negotiating session in Berlin, ahead of the formal meeting this week. They may call another emergency meeting to complete a deal before Christmas.
Germany was left almost alone in demanding that any resolution decisions were taken by the European Council, the forum for ministers, which lacks the structures to make rapid decisions. Berlin has now made clear that it is ready to agree for the Commission to trigger resolutions for banks, using the single-market legal basis – Article 114.
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