EU ministers focus on banking union

2012-06-22 11:38

Luxembourg - European finance ministers examined ways to strengthen their banking sectors and break the link between troubled banks and indebted countries on Friday, with concerns about Spain’s stricken banking system top of their minds.

IMF managing director Christine Lagarde has urged the eurozone to channel aid directly to struggling banks rather than via governments, but Germany and others are opposed to such direct lending, which is not possible under current rules.

The discussion is part of a broader debate about how the European Union can move towards a so-called banking union, including a Pan-EU deposit guarantee scheme and a fund to resolve bad banks, to try to get on top of the two-and-a-half year sovereign debt crisis.

Lagarde said on Thursday that allowing the eurozone’s rescue scheme - the European Stability Mechanism (ESM) - to aid stricken lenders directly rather than using a programme of aid to a government would stop bank problems from exacerbating the difficulties of countries.

Arriving at Friday’s meeting Spain’s Economy Minister Luis de Guindos said such a possibility may be open to Spain, which is set to receive up to €100bn of aid from the eurozone for its troubled banks.

“I think (direct bank recapitalisation) is a possibility,” he told reporters. “It is one of the fundamental elements to break the link between bank risk and sovereign risk.”

“This possibility is absolutely open to Spain if there is progress in the next few months (on the issue). The process of recapitalisation is not instantaneous,” he said.

Throughout the crisis, countries in the eurozone have been left to resolve problems at their banks themselves.

For those for whom the burden was too great, such as Ireland, the government received aid from the IMF and the EU to do it.

But after years in crisis, the problems in banks show no sign of abating and Europe’s leaders are under pressure to form a united front to shield struggling lenders rather than leave countries to cope with such problems alone.

At a summit in Brussels next week, EU leaders will examine establishing a banking union that envisages a single supervisor for big banks, a fund to wind down cross-border lenders in trouble and the deposit guarantee scheme to protect savers.

"Poisonous link"

Central to this is the idea is that stronger countries in the eurozone such as Germany ultimately stand behind the lenders of countries too weak to manage alone, although Berlin does not want any such step in the short term because it is opposed to bearing any liability for other countries.

“We need to break the poisonous link between sovereigns and banks,” said one EU diplomat close to discussions. “It’s about solidarity. It can’t happen overnight. It is difficult stuff."

A banking union is also contentious because it will likely shift power from national regulators to a higher authority, such as the European Central Bank (ECB).

France and Germany want the ECB to take charge of major systemic banks, rather than leaving oversight with the European Banking Authority.

One of the biggest divisions in the debate about such a union is whether it will apply only to countries in the eurozone, or to all 27 member states in the European Union.

Britain has said it will not join such a scheme, which it believes should be limited to the single currency area.

The European Commission, the EU's executive, wants the union to apply to all countries, because of concerns that scaling it back would undermine the bloc's borderless single market.

Michel Barnier, the EU commissioner in charge of financial regulation, will attend Friday’s meeting to appeal again for all countries to join.

In Luxembourg, ministers will also discuss warnings issued to countries by the European Commission to countries on improving the management of their economies to reach spending goals laid down in EU law.

Spain may receive more time to reach the goal of cutting its budget deficit to 3% of economic output, although one senior diplomat said this would only be discussed next week at an EU leaders' summit in Brussels.

Germany will also push for the introduction of a tax on financial transactions, a move demanded by the country’s opposition socialists in order to secure their backing in parliament to sign off on the ESM.