Agreeing a credit line between a common resolution fund and the ESM will be the most effective way of breaking the bank-sovereign doom loop, according to Finance Minister Michael Noonan.
There is no agreement at EU level for this proposal because some of the bigger states like Germany are still opposed to such a move.
Mr Noonan was speaking at the ‘Future of Banking in Europe’ conference held in Dublin.
The three key pillars of an EU banking union — a single supervisory mechanism, a common resolution mechanism, and a common deposit guarantee — have been broadly outlined and agreed.
However, a crucial part of a common resolution mechanism will be how a failing bank is recapitalised. The proposal is that over the next decade, every bank in the eurozone will pay into a fund that will amount to 1% of all deposits in the region.
The European Commission, the ECB, and some member states including Ireland, want a credit line between a common resolution fund and the ESM in the interim.
The German government, among other core member states, want each national government to put in place a backstop instead.
Mr Noonan said it is important to reach agreement over the ESM being allowed to recapitalise failing banks. Otherwise, he said, the pressure on stressed sovereigns in the periphery will continue.
Speaking at the same conference, which was organised by the Institute of International and European Affairs, the deputy head of the ECB, Vitor Constancio, said the single supervisory mechanism will bring huge benefits.
These include much greater transparency of financial institutions; the most up-to-date supervisory standards; a common approach to the treatment of non-performing loans and other distressed assets; as well as more mergers and acquisitions, which will create a more coherent and single banking sector.
However, SMEs across the EU have too much reliance on traditional bank funding. There is roughly €1.6 trillion of assets held by pension funds, insurance funds, and other types of investment management firms in the region. In future, there should be more direct investment from these funds into SME lending, Mr Constancio said.
More has to be done to develop a securitisation market for SMEs, he added.
Former IBRC chairman Alan Dukes noted that banks across the region could be forced to raise capital when the results of the ECB stress tests are made available next November.
This could put pressure on banks in view of the new resolution rules that will be introduced in 2018, although there were calls for these bail-in rules to be introduced earlier in 2016, he noted.
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