Draghi: Press ahead with banking union

European Central Bank president Mario Draghi put his weight behind a EU banking union in a trip to Berlin yesterday, two days after Germany led an attack on a proposal to centralise control of failing lenders.

German finance minister Wolfgang Schäuble sought to keep responsibility for failing banks in national hands during two days of meetings last week in Vilnius, Lithuania. He led a chorus of dissent against the Commission’s plan to give itself final say over when to close banks and to create a €55bn common fund for resolution costs.

If Germany derails momentum towards a year-end deal on a single resolution mechanism, it may imperil efforts to restore confidence in the eurozone’s financial system. Mr Draghi said the EU needs to press ahead.

“Banking union should help speed up the repair of banks — that is if, as I hope, we end up with a strong single resolution mechanism,” Mr Draghi said at an event in the German capital yesterday. “We need a mechanism that allows non-viable banks to be wound down without financial stability risks, as we see in the US.”

If the plan doesn’t move forward quickly, the ECB won’t be able to count on cross-border backstops if it encounters problems at euro-area banks. The ECB is scheduled to begin supervising lenders in the currency zone as soon as Oct 2014, forcing the EU to grapple with who should decide when to close a bank and who will pay for it.

ECB executive board member Yves Mersch said in Dubai yesterday that the banking union is the most immediate concern. The ECB has started preparatory work on a review of banks’ balance sheets and will provide a proposal for the assessment in coming weeks, he said.

Mr Schäuble said the European Commission’s proposal must be overhauled because it’s on shaky legal ground and could endanger national control of budgets. In Vilnius, he was joined by critics from Sweden to Slovakia. At the same time, finance ministers renewed pledges to strive for an agreement quickly so financial markets won’t lose confidence that the currency zone is overcoming its crisis.

“There’s quite a lot to do,” Mr Schäuble told reporters on Sept 14 after two days of talks with his EU colleagues in Vilnius. “The path that the commission has proposed toward a resolution mechanism is a rocky one. There can be no doubt about it: we need to be on a legally certain foundation.”

The new resolution authority, along with ECB oversight, form the core of an effort to create a euro-area banking union that would sever the link between bank and sovereign debt.

Dutch finance minister Jeroen Dijsselbloem, who chairs meetings of euro-area finance chiefs, said he was confident the EU would strike an effective deal.

Objections to the Commission’s strategy, proposed by EU financial-services chief Michel Barnier, included resistance to the planned common resolution fund and the scope of the system. Nations also voiced scepticism about expanded powers for the Brussels-based Commission.

While defending the core of his single resolution mechanism, Mr Barnier said he could see limiting the new authority to lenders that have cross-border operations. He also said the Commission isn’t married to being chief decisionmaker in the resolution system and would welcome a discussion on alternatives. The Commission put itself forward for the role because of its reading of the bloc’s treaties, Mr Barnier said.

Sweden’s finance minister, Anders Borg, said handing the Commission the power to shut down banks alongside its existing role as the bloc’s state-aid enforcer is a “conflict of interest”.