European Union Creates a Single Overseer under the European Central Bank to Directly Supervise about 150 of the Bloc’s Biggest Banks

Europe Has Plan for Failed Banks, but Germany Isn’t Convinced

July 9, 2013

New York Times - European Union officials are expected on Wednesday to unveil a detailed plan for dealing with failing banks, which will include centralized decision making and an emergency fund.

But Germany’s skepticism about giving authority to a group overseen by the European Commission, as well as other concerns, could bog the proposal down in months of rancorous negotiations. 

On Wednesday, Michel Barnier, the commissioner overseeing financial services, is expected to call for consolidating decisions under a group supported by around 300 staff members and creating a pool of money funded by mandatory levies on banks. The system, which was described ahead of the formal announcement, would rely on the European Central Bank to signal when a financial institution in the euro area was facing severe difficulties. 

A resolution board to be made up of representatives from the central bank, the European Commission and member states of the union would then make a recommendation, as necessary, on how to shut down or shrink a bank. The commission, the union’s policy-making arm in Brussels, would reserve the right to make a final decision. 

The board also could draw on the shared fund to help shut down or radically restructure failing lenders after creditors and shareholders have borne some losses. European Union officials want the size of the fund to be as much as 70 billion euros when it is fully funded by 2025. 

Giving the commission the power to close banks “is arguably the greatest transfer of sovereignty in the history of the E.U. and points toward a fiscal, as well as economic and monetary, union,” said Alexandria Carr, a lawyer with the firm Mayer Brown in London. 

But on Tuesday, Wolfgang Schäuble, the German finance minister, told the European Commission “to be very careful” with its proposal for a single authority because “otherwise, we will risk major turbulence.”

“We have to stick to the legal basis we have. Otherwise, we will fail and we will create new uncertainty in markets,” Mr. Schäuble said to other European finance ministers as they held their monthly meeting.

Mr. Schäuble insisted, as he has before, that treaties governing the European Union need to be changed before the plan to centralize decision making for failing banks — the so-called Single Resolution Mechanism — goes fully into force. Because treaty changes would be laborious and far from certain, Mr. Schäuble is arguing for a potentially long delay to the banking effort. 

But France called for swift adoption of the plan.

“We clearly want an agreement,” said the French finance minister, Pierre Moscovici. That agreement should be reached “by the end of the year,” he said.

Even as Germany sought to apply the brakes on a broad banking initiative, European Union finance ministers on Tuesday gave Latvia the formal go-ahead to use euro notes and coins in January 2014 by setting the conversion rate at 0.70 lats to 1 euro.

“We trust in Europe and we trust the euro,” Latvia’s finance minister, Andris Vilks, told a news conference.

That celebratory language contrasts with the hesitancy shown by Germany toward new banking efforts that many experts say are vital to ensuring the long-term survival of the euro. 

After months of wrangling, the European Union decided late last year to create a single overseer under the European Central Bank that would directly supervise about 150 of the bloc’s biggest banks. The purpose of the Single Resolution Mechanism — and the rule book for dealing with troubled banks that was negotiated two weeks ago — is to prevent the costs of bank collapses from affecting taxpayers and states. 

Such crises can quickly descend into a government debt crisis, as happened in Spain and in Ireland. Bank failures can also threaten the stability of the euro area when states can no longer afford the sky-high government borrowing costs that often come with bailing out their banks. 

The plan for the Single Resolution Mechanism, as well as the proposal for the single rule book, would still need the approval the European Parliament.