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A plan unveiled yesterday (10 July) by the European Commission to establish an agency with the power to wind up or restructure ailing banks in the eurozone will set off the most difficult round of negotiations yet in the continuing efforts to shore up the area’s banking sector.

The proposal, put forward by Michel Barnier, the European commissioner for the internal market and services, would give the Commission the final say on when to wind-up a bank or trigger a rescue, on the recommendation of the new agency.

The Commission sees the plan as the second pillar of its ‘banking union’, following the decision taken earlier this year to give the European Central Bank the role of single bank supervisor. Officials hope that the single resolution mechanism will come into operation in January 2015, covering all 6,000 banks in the eurozone. Non-eurozone countries in the European Union could choose to join.

Building funds

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Even if the draft legislation is not altered by the Council of Ministers or the European Parliament, which must approve the plan before it can come into effect, the system will be hampered from the start because it will take a decade to build up a central resolution fund to pay for any wind-up.

In addition, the agency would be prohibited from taking any decision that forces a country to use taxpayers’ money.

Announcing the plans yesterday, Barnier said that a single resolution mechanism was necessary because, while banks were international, supervisory and resolution authorities remained national. “We can’t go on like this,” he said.

He cited examples of the collapse of two cross-border banks, Dexia and Fortis. “We saw that we didn’t have the necessary rapid decision-making processes to resolve a bank,” he said. “We’re going to solve that situation and resolve together where necessary and do it properly.”

Fact File

How it would work

The European Central Bank, in its role as eurozone bank supervisor, would tell the new resolution board and national authorities when a bank was failing.

If the resolution board decided that the bank posed a systemic risk and a rescue from the private sector was not available, it would make a recommendation to the European Commission to trigger a resolution.

If the Commission approved, it would ask the board to set the resolution in motion and use the resolution fund. The board would instruct national resolution authorities to act according to national law.

The single resolution board

An agreement between member states and the European Parliament to approve the establishment of a single resolution board would set off the usual round of horse-trading about location and leadership. The board would have 300 support staff and an executive director and deputy executive director appointed by the Council of Ministers, subject to European Parliament approval.

When it meets in plenary session, taking general and budgetary decisions, the board would consist of the director and deputy, representatives of each national resolution authority and representatives of the ECB and Commission.

In executive session, for decisions about specific banks, the board would mirror its plenary-session formation, with the difference that only relevant national authorities would attend. Decisions would be taken by simple majority, with the director having the deciding vote. Member states where the bank is based would have a full vote, while those that host subsidiaries would have one vote between them.

The board would be funded by annual contributions from banks, to cover staff costs and other expenses.

The resolution fund

The Commission expects that it will take ten years for a resolution fund to hit its target level, equivalent to 1% of the covered deposits of all banks in the eurozone – about €60 billion. It would be financed by annual contributions from banks. The amount each bank would contribute would depend on its risk profile, to be assessed by the Commission, and those judged riskier would pay more. If there were disbursements from the fund, banks would have to make up the shortfall. Before the fund hits its target level it could impose additional levies on the banking sector or borrow from the market.

The fund would be used to provide loans to ailing banks – but only after losses have been imposed on creditors. The Commission acknowledges that until the fund is fully financed, taxpayers’ money might still be needed to finance rescues

The plan is intended to break the vicious circle between indebted banks and state finances, but Barnier said that taxpayers’ money might still be needed to save banks, particularly because of the time it would take to build up the fund.

Germany has been the most vocal critic of the plans during the discussions in recent months. On Tuesday (9 July), Wolfgang Schäuble, Germany’s finance minister, warned that the Commission’s plans risked causing “major turbulence” if the draft legislation did not “stick to the limited interpretation of the given treaty”.

Germany believes that any move to take the decision away from national governments about when to use public money could be in breach of current EU treaties.

Commission officials say that giving the Commission the final say on bank rescues, together with limiting to some extent the power of the central agency, means that treaty change is not necessary.

The proposal is linked to an overhaul of rules governing state aid for bank rescues, announced yesterday by Joaquín Almunia, the European commissioner for competition. From next month shareholders and junior creditors at a failing bank would have to bear losses before public money could be granted.

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