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EU limits agency that may shut troubled banks amid German concern

Blueprint for dealing with stricken lenders outlined; authority of new body curtailed amid Berlin's concern about Spanish banks

PUBLISHED : Thursday, 11 July, 2013, 12:00am
UPDATED : Thursday, 11 July, 2013, 3:17am

The European Commission proposed creating an agency to salvage or shut failed banks yesterday, but the absence of an immediate backstop fund to pay for a clean-up means it may struggle to do its job.

Working in tandem with the European Central Bank as supervisor, the new authority is supposed to wind down or revamp banks in trouble. It constitutes the second pillar of a "banking union" meant to galvanise the euro zone's response to the crisis.

If agreed by European Union states, the agency will be set up in 2015 and eventually have the means to impose losses on creditors of a stricken bank, according to the blueprint.

But the new authority will be handicapped by the fact it will have to wait years before it has a fund to pay for the costs of any bank wind-up it orders. This means it could be difficult to demand any such closure.

Officials say the plan foresees tapping banks to build a war chest of €55 billion (HK$550 billion) to €70 billion, but that is expected to take a decade, leaving the agency largely dependent on national schemes in the meantime.

"We have also seen how the collapse of a major cross-border bank can lead to a complex and confusing situation," said Michel Barnier, the commissioner in charge of regulation. "We need a system which can deliver decisions quickly and efficiently, avoiding doubts on the impact on public finances, and with rules that create certainty in the market."

The EU's executive will not, however, call for giving a backstop role to the euro zone's rescue fund, the European Stability Mechanism.

The lack of initial funds or recourse to the European Stability Mechanism undermines a central goal of banking union - to sever the "doom loop" that forms as banks buy ever more government bonds from their home states.

Any suggestion of putting such a safety net in place faced stiff resistance from Germany, which feared that it could be left on the hook for problems uncovered in Spain's banks, or elsewhere, when the ECB starts policing the sector next year.

Furthermore, the "resolution board" that executes bank wind-downs will be forbidden from imposing decisions on countries, such as demanding the closure of a bank if that would result in a bill for that country's taxpayers.

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