Eurozone may use SRM borrowing to prevent shocks

The eurozone’s Single Resolution Mechanism could use its borrowing ability to cushion shocks to countries whose financial systems are roiled by major bank failures, Dutch finance minister Jeroen Dijsselbloem said.

The EU last week agreed to create a new agency to handle eurozone bank failures. The compromise needs approval by the European Parliament and by national governments to become law.

As part of the SRM deal, an industry-financed Single Resolution Fund will be created to cover the cost of saving or shuttering lenders. During the fund’s start-up period, its resources will be segregated in national compartments.

Dijsselbloem said in the Dutch parliament that this phase-in plan will shield banks in some countries from having to make extra contributions on behalf of banks that were already in trouble at the start of the new system.

Because banks face additional levies each time the fund is used, “if there have been problems in the Netherlands, the Dutch banking system will get an additional levy to fill up that part of the fund that has not been mutualised,” Dijsselbloem said.

These extra levies have the potential to cause further damage if they are imposed too quickly, said the Dutchman, who also leads the group of euro- zone finance ministers. He said the fund’s ability to borrow is a “real” way to address that issue.

“The ex-post levy will then be stretched out over a number of years; it will in the end be collected from the banking industry,” he said. “This prevents destabilisation.”

The borrowing system is not the same thing as a new public government commitment to stand behind banks, he said. It also doesn’t tie the bank resolution fund directly to the European Stability Mechanism, the currency bloc’s firewall fund.

“The borrowing capacity does not require additional national guarantees, and doesn’t require a European common backstop,” Dijsselbloem said.

“Some asked for a common backstop out of the ESM,” he said. “But that’s not necessary, at least as long as the borrowing capacity of the fund is not overstretched. The fund has a certain credit worthiness, it can borrow based on the legal obligations written down” in the bank resolution agreement.”

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