The breakthrough ends an impasse with the European Parliament, which
persuaded euro zone countries to strengthen the scheme. It completes
the second pillar of banking union, which starts at the end of the
year when the European Central Bank takes over as watchdog.
The accord means that the ECB has the means to shut banks it decides
are too weak to survive, reinforcing its role as supervisor as it
prepares to run health checks on the still fragile sector.
ECB President Mario Draghi said that plans to allow the new
'resolution' or clean-up fund to borrow to top itself up looked
promising and that the decision-making scheme to shut a bank had
"The point we've always made that we need a mechanism that is
properly funded and the agreement actually improves the existing
funding," Draghi told journalists as he entered a meeting of
European Union leaders.
"All in all we made progress for a better banking union."
Michel Barnier, the European commissioner in charge of regulation,
said the scheme would help to bring "an end to the era of massive
"The second pillar of banking union will allow bank crises to be
managed more effectively," he said.
Thursday's agreement makes it harder for EU countries to challenge
the ECB if the central bank triggers bank closures, and establishes
a common 55 billion euro back-up fund over eight years — quicker
than planned but far longer than the ECB's watchdog had hoped.
But the new system, which Barnier conceded was not 'perfect', has
For one, the 'resolution' fund is small and would, in the view of
the ECB watchdog, be quickly spent. To remedy that the fund will be
able to borrow to replenish spent money.
Euro zone governments will not, however, club together to make it
cheaper and easier for it to do so.
The 18 euro zone countries do not intend to cover jointly the cost
of dealing with individual bank failures, a central tenet of the
original plan for banking union.
Germany resisted pressure from Spain and France to make such a
concession. Its finance minister Wolfgang Schaeuble welcomed new
rules forcing bank creditors to take losses and that "the mutualised
liability ... remained ruled out" — a reference to sharing the
burden of a bank collapse.
Neither will there be any joint protection of deposits.
Almost seven years since German small business lender IKB became
Europe's first victim of the global financial crisis, the region is
still struggling to lift its economy out of the doldrums and banks
are taking much of the blame for not lending.
The banking union, and the clean-up of banks' books that will
accompany it, is intended to restore their confidence in one
another. It is also supposed to stop indebted states from shielding
the banks that buy their bonds, treated in law as 'risk-free'
despite Greece's default in all but name.
[to top of second column]
Under the deal reached, a fund made up by levies on banks will be
built up over eight years, rather than 10 as originally foreseen.
Forty percent of the fund will be shared among countries from the
start and 60 percent after two years.
It also envisages giving the European Central Bank the primary
role in triggering the closure of a bank, limiting the scope for
country ministers to challenge such a move.
Mark Wall, Deutsche Bank's chief euro zone economist, said new rules
to impose losses on the bondholders of troubled banks would reduce
the burden on the fund but warned that its size was too modest. "A
cross-European fund of the size of 55 billion raises some eyebrows
in terms of scale," he said.
The fund will be able to borrow against future bank levies but will
not be able to rely on the euro zone bailout fund to raise credit.
Critics say this means primary responsibility for problem lenders
remained with their home countries and that the banking union will
never live up to its name.
"The key to the banking union is an authority with financial clout.
They don't have it so we don't have a banking union," said Paul De
Grauwe of the London School of Economics.
"The whole idea was to cut the deadly embrace between bank and
sovereign. But if a banking crisis were to erupt again, it would be
back to how it was in 2008 with every country on its own."
Carsten Brzeski, an economist at ING, said the decision-making
process to shut a bank was too complicated and long-winded.
The fragility and politicized nature of Europe's banks has been
highlighted by ailing Austrian state lender Hypo Alpe Adria <HAABI.UL>.
Vienna will sponsor a bad bank to isolate roughly 18 billion euros
of bad loans extended by the bank after Joerg Haider, the far-right
politician who governed its home province, earlier ramped up its
Despite the bank's impact on national debt, many politicians feel
Austria has little choice. Were banking union in place, the
situation would be little different.
(Additional reporting by Martin Santa and Jan Strupczewski in
Brussels; editing by Catherine Evans and Susan Fenton)
[© 2014 Thomson Reuters. All rights
Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.