German recapitalisation worries eased

European Union ministers overcame German unease at direct aid to lenders and agreed on rules for how public funds can be made available for banks shown to have insufficient capital in upcoming balance-sheet checks.

EU finance ministers meeting in Brussels on Friday smoothed the wording of a statement on how they’ll deal with shortfalls after the European Central Bank’s asset-quality review and stress tests. The final wording gives reassurances that Germany’s parliament would have the right to veto any direct aid from the region’s common bailout fund. Member states should “implement appropriate arrangements, including the establishment of national backstops ahead of the completion of this exercise,” according to the statement published by the Council of the European Union. Direct lending by the ESM bailout fund may only be used “when adopted according to euro -area and national procedures,” leaving room for the Bundestag to object.

German chancellor Angela Merkel’s Christian Union bloc and the Social Democrats, in negotiations to form Germany’s next government, were deadlocked this week on whether to allow direct recapitalisations for weakened banks. The statement’s language reflects Germany’s reluctance to commit to rules before it forms a new government, and its view that direct recapitalisation of banks via the ESM won’t start for at least another year and will then still require approval by German lawmakers.