They are looking for “a very complex agreement” to resolve the banking crisis

The EU wants rules and a common intervention fund in case of problems in financial institutions
Minister Saccomanni: “Germany holds back for fear of needing to finance other countries’ debts”

Yesterday the Minister of Finance, Fabrizio Saccomanni, defined it as a “very complex agreement” to reach. And in fact, after 14 hours of negotiating on the national resolution systems for the bank crisis, the ECOFIN Council ended the evening with the Ministers of the 20 member states, who had decided to meet again next week. The new meetings are for Tuesday, December 17 with Eurogroup, followed the next day by the ECOFIN Council, scheduled to try to finalize the agreement before the Summit of Heads of State and Government on Thursday. The greatest resistance came from Germany, who “is concerned about being called upon to finance debts of other countries,” as Saccomanni explained, although he remains optimistic: “We can find a compromise.” “We don’t have a clear agreement on the table so much as general principles shared by all,” admitted Rimantas Sadzius, Finance Minister of Lithuania, the country hosting the presidency of the EU Council. The only thing that Sadzius clarifies is that once the mechanism for resolution of banking crises will be completed “it will apply to all banks that are located within the banking union” with supervision and management of recovery that does not follow standard procedures but “case by case.”

While the first pillar of the banking union, the Single Supervisory Mechanism (SSM), entrusted to the ECB, has already been approved, the second and third pillars are in discussion, namely: the launch of a European system for the resolution of financial institutions’ crisis; the Single Resolution Mechanism (SRM); and the third, the establishment of a common deposit guarantee.

And these last two are the most difficult issues in the negotiations. This is only about writing the rules on how to cover the holes of troubled banks, to avoid one bank’s crisis from dragging another down, as in the recent crisis of world financial institutions, and the states will have to come to an agreement on three main points: what are the basic rules for operation of the mechanism; in the time of need which authority will decide the need to intervene; and lastly, where will they obtain money for closure. Germany absolutely wants no kind of public intervention, the so-called bailout, but only interventions of funds created with the shareholders’ money or private funds – the bail-in.

For the moment they have only reached an agreement in principle on the Bank Recovery and Resolution Directive (BRRD), which is the step prior to the SRM or the Commission’s proposal on common rules at the European level, but with mechanisms (and therefore funds) split between various countries. This is practically a journey whose path still needs to be defined better. It would begin January 1, 2015 and a ten-year transition period is expected to phase resources into the coffers of the future single fund at the EU level to have it completely operational by 2025. Once the mechanism is fully operational, it should operate according to this scheme: before accessing the resolution fund, recourse to a bail-in is expected with the burden on the shareholders with a ceiling of 8% of bank assets. If the bank loses in excess of more than this 8%, they would have an additional contribution equal to 5% of the value of bank assets, to be borne by bondholders, companies and deposits above 100 thousand Euros, so as to get to a threshold of private lending by 13%. Only after that would a single resolution fund, undersigned by the bank for about 45 billion, be accessible.

But in the 10 years of the transition period under BRRD the resources of the single fund would be limited and thus, only in case of emergency would there be the need for an intervention from the states, another point of conflict between those who – like Italy, would be favorable, and those who – like Berlin, don’t want to risk their taxpayers’ money. Because of this, the key point on which the Ministers are seeking agreement is precisely a “progressive mutual” resolution fund, pointed out Minister Saccomanni, and then his French counterpart, Pierre Moscovici, reiterated “what we need is a strong dose of mutualism,” thus getting a single fund for them is therefore “essential.” Germany would compromise on public funds but only as a very ‘last resort’ but would want firm guarantees. There’s still a week to try to quickly close the deal and find an acceptable compromise; otherwise, it will mean that the road to a solution would really be uphill.

Alfonso Bianchi e Renato Giannetti