Plan to deal with problem banks to be unveiled today

A detailed proposal to restructure or wind up problem banks with minimal cost to taxpayers while countries build up funds to pay the cost in the longer term will be announced by the European Commission today.

But Germany is suspected of wanting to slow down banking union, warning a new resolution authority may need changes to the EU treaties, while France is pushing to set it up quickly.

Berlin has warned that unless the proposal is watertight under the current EU treaty, they will veto it. The commission said they have limited their proposal to what can be achieved under the current treaty.

Finance Minister Michael Noonan, following a meeting in Brussels yesterday, said his German counterpart, Wolfgang Schäuble was happy enough to agree to a single resolution mechanism.

The Single Resolution Mechanism (SRM) for the banking union will complement the Single Supervisory Mechanism (SSM) which will see the ECB directly supervise banks in the euro area, including Bank of Ireland and AIB.

While the tighter supervision and regulation is expected to lessen the possibility of banks failing, it will not eliminate it. The SRM would apply the substantive rules of bank recovery and resolution that are shortly to be adopted following agreement among the EU’s finance ministers and the European Parliament last month.

The proposed structure would have eliminated the need for state funding in all but five cases with Anglo Irish Bank the biggest of them, EU sources said.

The mechanism to cover approximately 6,000 banks would work as follows:

*When the ECB signals a bank was in trouble, a single resolution board, with representatives from the ECB, the commission and the national authorities of where the bank is headquartered and has branches/subsidiaries, would prepare the resolution.

*It would be responsible for the key decisions on how a bank would be resolved with national authorities closely involved.

*On the basis of the recommendation the commission would decide whether and when to place the bank in resolution, with the board having the final say while national authorities would be in charge of the execution.

*A single bank resolution fund would be established to provide medium term funding while the bank was being restructured. The money would come from contributions from the banking sector and would pool national resolution funds.

*The board would have an executive director, and a deputy, representatives of the commission and the ECB and representatives of the resolution authorities of participating member states. Each would have one vote, with the host member states sharing a vote between them. There would be no veto.

The revised guidelines on state aid to banks, also due to be adopted today, and on the possibility of direct bank recapitalisation by the European Stability Mechanism will allocate bank losses to shareholders and creditor instead of to taxpayers. Private investors would have to be bailed-in before national and ESM funds could be tapped.

The resolution fund, made up of contributions from the banking sector, would not replace private investors being bailed in but would give financial aid including guarantees or loans in the short or medium term to ensure the viability of the restructured bank to ensure financial stability of the overall economy. This will be built up, possibly over 10 years and in the meantime, could borrow funds on the market or levy additional contributions from the banking sector. In exceptional circumstances money could be borrowed from the state. Member states could not be forced to bail out a bank

The total size of the resolution fund would be 1% of the covered deposits of all banks in the union — €55bn based on 2011 data — over 10 years although this could be extended to 14 years if disbursements were more than a half of the target. Each bank’s contribution would be determined by their risk profile. The board would be financed by a levy on the banks also.

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