France, Germany inch towards deal on banking union

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Finance ministers meeting in Brussels today (10 December) will seek to progress on how to close failing lenders, part of an ambitious plan to create a single banking framework and fix broken banks whose problems have festered since the financial crisis, amidst reports that a deal is imminent.

Under pressure to strike a deal by the time European Union leaders hold a summit next week, finance ministers will try to resolve ongoing differences. Eurozone ministers who gathered yesterday (9 December) will be joined by EU counterparts outside the currency bloc today.

Creating an agency to close eurozone banks, as well as a fund to pay for the clean-up, would mark a deepening of integration of the 17 nations sharing the euro. But it raises complex questions of sovereignty and who will foot the bill.

Banking union, involving a single bank supervisor and an 'executioner' to close banks, is the most ambitious project launched since the region's debt crisis and is designed to provide a stronger underpinning to the single currency.

"There's a chance (of a deal). It will be a lot of work," said Germany's Finance Minister Wolfgang Schaeuble, adding that ministers may need to meet again to clinch an agreement. Ireland's Michael Noonan, arriving in Brussels, said there were still "wide differences".

After more than three years of financial market turmoil following the bailouts of Greece, Ireland, Portugal and Cyprus, establishing a more unified banking system in the eurozone is seen as critical to defend against future crises.

But France and Germany have different visions of how a banking union would work in practice, with Berlin concerned about an over-centralisation of powers in a bank agency.

Germany also does not want a single fund to pay for the clean-up. France, backed by Italy and Spain, however, want a new pan-euro zone show of unity.

Moscovici hints at possible deal

In search of a compromise, ministers from the biggest eurozone economies – Germany, France, Italy and Spain – met in Berlin last week, amidst unsubstantiated reports that a deal was close to completion.

"Everyone moved a little," France's Finance Minister Pierre Moscovici said of the gathering. He told the Financial Times: “We have to build compromises,” adding that: "There has to be both a single resolution fund and a role given to national input,” suggesting that France and Germany have been negotiating on this core point of difference.

With so much at stake, it may fall to Europe's political leaders, including German Chancellor Angela Merkel and France's Francois Hollande, to negotiate an agreement when they meet in Brussels next week (19 & 20 December).

In essence, a banking union would make eurozone banks less dependent on governments in the countries they operate in, weakening the 'doom loop' between highly-indebted sovereigns and the banks that finance them.

Which institution to make decisions about banks?

But for such a scheme to become reality from the start of 2015, ministers need to agree in the coming days on which EU institution should have the power to say that a bank anywhere in the eurozone must be closed. They also have to decide how to pay for a bank restructuring or closure.

While the cost will eventually be borne by the banking sector itself from annual contributions, authorities may need extra cash up front before enough contributions accrues and the ministers have to agree who should make the advance.

To minimise any costs that eurozone taxpayers may have to cover, the ministers have already agreed that bank shareholders, bond holders and even depositors will be the first to lose money in the case that a bank is wound down.

But they have yet to agree on when the new, tougher rules on bank shareholder and creditor losses are to come into force. The initial plan was 2018, but this now looks likely to be pushed forward to 2016 instead.

At a summit in October last year, EU leaders agreed plans to complete the European banking union by January 2014, after the general elections in Germany.

The concession was made to German Chancellor Angela Merkel who argued for "quality" over "speed" in putting in place the new supervisory system, seen as a cornerstone of the EU's efforts to end the eurozone' sovereign debt crisis.

>> Read: 

EU summit deal aims for full 'banking union' in 2014

A new milestone in the EU’s efforts was reached in June when finance ministers struck an agreement on banking union that would force investors and wealthy savers to share the costs of future bank failures – or so-called ‘bail in’ – to shield taxpayers from unpopular bank bailouts.

The European Commission then tabled new proposals in July to complete the banking union with plans to establish a single euro zone authority to wind up failed banks – a move that fell foul with Germany.

>> Read: Commission seeks sweeping new powers over failed banks

  • 10 Dec.: Ecofin meeting, Brussels
  • 19-20 Dec. EU summit [see draft agenda]

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