28 February 2013

Bloomberg: Constâncio says Barnier plan not enough for bank failures

Constâncio called for a “true European resolution authority” to provide temporary support when necessary, in comments to the Centre for European Policy Studies in Brussels yesterday. He said national regulators on their own can’t work together enough to contain a major cross-border bank emergency. “We need a European-level entity and fund that can deal with those cases”, Constâncio said. “If the solution would be just coordination of national resolution authorities and a network of national authorities, than it cannot really address the cross-border question.”

Constâncio was responding to comments Barnier made earlier this week that common EU resolution funds are politically unworkable. The Brussels-based commission will announce proposals later this year for a European Resolution Authority, which Barnier says should make use of national funds rather than a central pot of money.

Barnier said the forthcoming resolution plans need to acknowledge German reluctance to take on more cost-sharing of backstops. Euro area nations already contribute to a €500 billion ($655 billion) firewall. Five of the currency bloc’s 17 countries have sought aid. Fears of big bailout tabs from bank failures, and the “mutualisation of liabilities”, are overblown, Constâncio said yesterday. He said authorities can augment an industry-funded backstop with temporary support for a so-called bridge bank, and costs can be recovered from creditors afterwards.

As a precursor to the central resolution authority, the EU has proposed a plan to standardise national deposit insurance programmes and to create a common approach for handling failing banks. This interim legislation will call for nations to adopt so-called bail-in rules for imposing losses on creditors of failing banks. Constâncio said these rules need to be augmented by a central fund, similar to the Federal Deposit Insurance Corp in the US, which can step in to manage the process of shutting down a failing bank.

“Bailout of banks is for governments to do, if they wish and can do it”, Constâncio said. “Here it’s for resolution, which means funding by the sector itself and then the pecking order” of creditors who are in line to absorb losses. “In the end, this does not imply any serious amount of public money”, Constâncio said.

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