05 December 2013

Bloomberg: Dijsselbloem seeks EU bank failure breakthrough by dividing plan

The Netherlands supports a solution “whereby you split up” Barnier’s proposal, which includes a central resolution authority backed by a single fund, filled from levies on banks, that would cover the cost of restructuring or shutting down lenders, Dijsselbloem told lawmakers in The Hague yesterday.

An accord on the SRM’s decision-making body could be pursued based on current proposals, while talks on the fund could be held separately. Dijsselbloem acknowledged that the European Commission “and some Member States still oppose” this option.

Dijsselbloem also laid out his new proposal for how the fund would work, calling for it to comprise a system of “compartments” to make sure failing banks don’t topple the financial system. “I think it is important we will have a European fund shortly, whereby there is a balance between a stable European sector based on obligatory payments by the various banks", Dijsselbloem said. The fund needs “compartments which are sufficiently filled up. This will be problematic in the first years. That’s why in the first couple of years national backstops are important.”

“The Dutch proposal is a more hybrid structure", Dijsselbloem said. “We said it could be a European fund with national compartments within this fund, whereby the national sector pays in these national compartments. And when it’s necessary to draw money out of it by a Dutch bank which is in resolution, it must be paid out of the Dutch compartment.” “In the end the national government is the backstop", he said.

As an intermediate step, the national resolution funds could be “connected” to back each other up, he said. In the aftermath of a costly bank failure, lenders would pay higher fees to restore these funds to full strength. ‘‘What happens when your compartment is empty? Then you can think of national compartments lending to each other, then it is thinkable that ex-post that will be levied on the national banking sector", Dijsselbloem said.

Lending between ‘‘compartments’’ must be limited to avoid overburdening healthy banks, he said. ‘‘This can only take place within certain margins. A very large ex-post levy cannot be a burden to the sector because then the sector will break down", Dijsselbloem said. Instead, the nation could tap the European resolution fund until it is depleted. ‘‘Then there is the ESM with a banking programme. That is the final final backstop", he said.

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A Merkel ally has said the proposal is a "reasonable way forward" provided "core" German conditions on Banking Union are met. Michael Meister, a lawmaker with Merkel’s Christian Democratic Union party, said in an interview in Berlin: “The order in which the resolution mechanism and the fund are discussed is something I’m open to, provided one can achieve the right result".

Meister said that he could envisage Germany also backing Dijsselbloem's proposal to “compartmentalise” contributions into a European bank resolution fund, meaning banks from Member States would pay into separate pots in a fund of funds. “Fundamentally, I can imagine this would be an acceptable proposal", said Meister. Raising funds from banks should be harmonised and based on the size of a bank’s assets, the risk weighting of its investments and its integration in the banking sector, he said.

Further reporting, 6.12.13

© Bloomberg