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The European Commission is on collision course with a group of EU capitals, led by Berlin, over plans to reform rules for bailouts of failing banks.
The bloc’s executive wants to stop countries throwing public money at smaller lenders, which have until now escaped tougher rules and have continued tapping the public purse. Governments are worried they will end up footing the bill for collapses in other countries.
The proposals, due to be published on Tuesday, were described as “contentious” by one EU diplomat, speaking on condition of anonymity because of the sensitivity of the issue. The ensuing battle between the Commission and governments over the final shape of the legislation is likely to last months.
A spate of banking failures in the U.S. has thrust the terror of bank runs and financial contagion from panicking depositors back into the spotlight. Despite that, the Commission isn’t going to find it easy to toughen up the EU’s regime.
It’s just the latest European issue to raise hackles in Berlin, following a standoff between Brussels and the German government over the use of e-fuels in cars and opposition to the way national spending rules could be overhauled.
While eurozone finance ministers broadly agree with the principle of restricting the use of taxpayers’ money for bank bailouts, there is fierce opposition to Brussels meddling with existing national rules.
Commission documents, first reported by POLITICO, state that “many failing banks of a small or middle size have been dealt with under national regimes often involving the use of taxpayer money (bailouts).” The reforms are aimed at moving away from that practice.
This set of banking reforms represents a significant scaling back from a fully-fledged EU-wide deposit insurance scheme, EDIS, which Germany killed off last year after struggling to gain political support since it was first proposed in 2015. Still, many of the issues that plagued that debate — including fears among some EU countries of being on the hook for losses in another country’s banking sector — haven’t disappeared.
Making things worse
Some countries also worry that overhauling the rules could create more risks to the taxpayer, rather than the reverse. And others fear potentially higher costs for their banks lurking in the small print of the draft legislation.
In a sign of just how political the debate is, the Commission pulled the proposals at the last minute in March amid pressure from all sides.
This month, German Finance Minister Christian Lindner wrote to top EU officials expressing his “grave concerns” over how the plans might affect his country’s setup.
Loss-absorbing cushions
The draft plans aren’t likely to ease national concerns that the move could impinge on their powers and put more money on the line.
The basic premise of the Commission’s reforms is to bring more mid-size lenders into the bank-specific resolution framework, which ensures orderly winddowns and forces banks to raise loss-absorbing cushions so that investors bear the costs in a collapse.
But the difficulty is that mid-sized banks have struggled to fit into the framework because they may have to impose losses on big depositors to meet a key threshold — which could spark panic, as seen in the U.S. last month.
The Commission’s solution, according to the documents, dated March 24 and still subject to change, would be to allow EU capitals to use their deposit guarantee schemes — national cash pots funded by the banking industry to protect deposits to the tune of €100,000 — upfront to bridge any shortfall in funding.
That would then mean the failing bank could tap an €80 billion EU fund for bank failures, also funded by the industry, under the condition that the lender exits the market.
“We are just speaking about their death so it’s not really a free lunch, except if you consider that there is a sort of funeral banquet,” Dominique Laboureix, chair of the EU’s resolution authority, told POLITICO in an interview in March, batting away potential criticism.
To make the intervention possible, the Commission would change the preferential debt ranking of the deposit guarantee schemes in an insolvency.
But that creates a risk that those pots of money won’t then be replenished as fully as a result, and national taxpayers or the industry could potentially have to pick up the bill if they are depleted.
A second EU diplomat, speaking on condition of anonymity, said those elements will be under “every scrutiny.”
Rainy day
The plans ultimately breach red lines from France, Germany, the Netherlands and Finland, set out in a joint December statement to the Commission, seen by POLITICO — which warned against tampering with the threshold for the EU rainy-day fund, weakening the creditor hierarchy for deposit guarantee schemes or endangering national or industry safety nets.
And the Commission will have to contend with a fuming Germany, which hasn’t got its wish for a broader exemption for its own specific protection schemes for cooperative and savings banks.
While Germany won some language in the documents distinguishing the model, it’s not likely to be enough to satisfy it.
