Fri Nov 8, 2013 9:05am EST
* Central bank warns that common fund needed in banking union
* ECB backs early rules to imposes losses on bank creditors
* Germany's Schaeuble, ECB's Draghi meet at ministers' meeting
By Eva Taylor and Sakari Suoninen
FRANKFURT, Nov 8 (Reuters) - Leaving countries to cope with their problem banks alone would defeat the point of banking union, the ECB said on Friday, putting it on a collision course with Germany before crucial negotiations next week.
The remarks, issued in a legal opinion, represent a fresh attempt to win over Germany's reluctant finance minister Wolfgang Schaeuble to a central tenet of banking union - the creation of a single fund to cover the cost of bank failures rather than leaving countries to foot the bill alone.
Germany could yet soften its stance but only on condition that 'bail-in' rules to impose losses on the bondholders and big depositors of failing banks are introduced three years earlier than planned - in January 2015.
In the legal opinion, the European Central Bank sided with this German demand, saying an early introduction would offer clarity to investors.
"The ECB supports implementing the bail-in tool earlier than 2018. Bail-in is considered to already be priced in to a large extent, so the impact on funding is expected to be marginal," it said.
But the ECB also said the euro zone needed a single fund to break the debilitating link between countries and their troubled banks, contradicting the German emphasis on national obligations.
"Coordination between national resolution systems has not proved sufficient," the ECB said.
"By pooling resources, the (fund) will be able to protect taxpayers more effectively than under national arrangements, and thus break the adverse nexus between banks and their respective sovereigns."
The debate will come to a head when Schaeuble meets ECB President Mario Draghi at a gathering of European ministers next week to negotiate building the second pillar of the banking union - an agency and fund to close troubled lenders.
Having tasked the ECB to police euro zone banks from late 2014, ministers are under pressure to agree this joint scheme for closing or salvaging troubled banks by a self-imposed deadline of the end of the year.
Resolving these differences of opinion is critical to banking union, the most ambitious European project since the start of the single currency, aiming for closer integration to draw a line under the financial crisis.
Germany, Europe's biggest economy, has been putting the brakes on discussions, fearing that such a scheme would leave it to foot the bill for bailing out troubled lenders in other euro zone countries. It also does not want to be told by Brussels to close a German lender.
STILL IN TROUBLE
Between 2008 and 2011, the European Union spent the equivalent of a third of its economic output on saving its banks, but relied on taxpayers' cash. In the case of Ireland, reckless bank lending almost bankrupted the country.
Yet five years after the financial crisis erupted, many European banks remain in trouble, holding back the euro zone economy as it gradually recovers from recession.
The issue of how to pay for bank clean-ups is pressing as the ECB will run a series of tests next year for banks to come clean with any hidden losses before the central bank takes them under its watch.
The exercise is expected to reveal capital holes of billions of euros and the ECB wants to know how such shortfalls will be dealt with before it embarks on its new mission in order to avoid later rattling financial markets.
"Once the single supervisory mechanism is operational and supervision is elevated to the European level, the same needs to happen for resolution," it said, referring to the scope of a new agency to close banks and fund to pay for the fall-out.
- Link this
- Share this
- Digg this
- Email
- Print
- Reprints
