European Central Bank clashes with Germany over euro zone bank resolution

Brussels: The European Central Bank clashed with Germany on Tuesday over how quickly the Eurozone should set up a full banking union, calling for it to be ready by mid-2014 after Berlin declared it wanted a slower pace.

European Union finance ministers meeting in Brussels on Tuesday are due to discuss plans for the banking union, which could help the currency bloc deal with failing banks.

“We want a single European resolution regime, together with a single resolution agency and a single resolution fund that is financed by a levy from the banking industry,” ECB Executive Board member Joerg Asmussen, who is German, said.

“This should come into place in parallel with the single supervisory mechanism hopefully by the summer of next year,” he told reporters on entering the finance ministers’ meeting.

The comments set him at odds with German Finance Minister Wolfgang Schaeuble, who has argued that while current EU law would allow the ECB to act as a single banking supervisor, setting up a new single resolution authority to restructure or wind up failed banks will require changes to EU treaties.

That process could take years and would be risky, as the revised treaties would need to be ratified by 27 EU parliaments.

Some EU diplomats see Germany’s demand as a tactic to stall discussions until after parliamentary elections there in September, in which the issue could be used to rally voters tired of Eurozone bailouts against Chancellor Angela Merkel.

But Schaeuble insists a legal base for bank resolution is crucial, because at that stage money becomes involved.

“When a bank is wound up, money and jobs are usually lost. Those affected will seek redress. If there is an activity that needs a solid legal base, it is resolution,” he wrote in the Financial Times newspaper on Monday.

To soothe German concerns about having to pay for winding down a bank elsewhere in the Eurozone, Asmussen said the ECB would review the banks it supervised, to clarify who was responsibility for their condition up until it took charge.

“What we want to do ... is do a thorough asset quality review of the banks that will be supervised by us,” he said.

Two-step approach

Schaeuble proposed that instead of setting up the full banking union by 2014, the Eurozone could settle for now for a coordinated network of national resolution authorities.

Treaty change for a single resolution authority could always come later, Schaeuble said, but admitted that the intermediate result would only be a banking union “of sorts”.

Most Eurozone countries and the European Commission believe current EU law is enough to set up a single resolution authority. Like the ECB, they want the process completed quickly to boost investor confidence, spur lending to companies and help the Eurozone economy grow.

“On the banking union, we need to go fast now, and in a global way on all fronts: on supervisory mechanisms, on deposit guarantees and on the resolution mechanism, and at the end have an integrated resolution authority,” French Finance Minister Pierre Moscovici told reporters on entering Tuesday’s meeting.

The ministers will not solve the problem on Tuesday, but will debate another thorny issue called “bail-in” — who should lose money when a bank collapses, in what order, and from what point in time the rules will apply.

“In our view this should be dealt with swiftly, since we want to have the bail-in instruments available in 2015, not in 2018, and what we want to establish here is in the bail-in process a pecking order,” Asmussen said.

“First shareholders have to be burned, then all junior bank bondholders, then unsecured senior bank bondholders and uninsured depositors at the very end.

“This means we want to establish a clear depositor preference and that also includes, in any case, that deposits below 100,000 euros will be protected,” he added.