Peter Morrison, Associated Press
LUXEMBOURG — European Union finance ministers sought an agreement Friday on how best to downsize or close banks without sowing panic or having to call on taxpayers to bail out ailing lenders.
The EU's 27 finance chiefs' met in Luxembourg to agree on the order in which investors and creditors would have to absorb losses during bank restructurings. One of the stumbling points is who would be hit hardest: Should losses be limited to banks' shareholders and creditors, or should ordinary savers holding uninsured deposits worth more than 100,000 euros ($132,000) also be included?
Ministers said they were bracing themselves for marathon negotiations as they headed into the meeting. The EU's top economic official, Commissioner Olli Rehn, voiced confidence that an agreement can be reached in what would be another important step to stabilize the bloc's financial system and establish a so-called banking union.
The banking union, which will make the supervision and rescue of banks the job of European institutions rather than jeopardizing member states' finances, is a key part of the EU leaders' plans to restore financial and economic stability to the region.
"We have a fair chance to concluding the work, and it will be very important to maintain the momentum on the banking union," Rehn said.
One controversial issue was how much leeway member states should be granted in making decisions on winding down banks. Some countries like Britain don't want to be bound by too rigid European rules. Other nations warned that too much flexibility would create new imbalances between the bloc's weaker and stronger economies and destroy the project's very aim — establishing a single set of rules that creates certainty for investors and restores trust in the financial system.
"I think it's necessary that we have a joint solution in Europe to ensure that the European single market won't be further fragmented," said Luxembourg's Finance Minister Luc Frieden. "It's about ensuring that people in Europe know that we have strong financial institutes but they also have to know what happens when a bank is being wound down," he added.
Europe has already had to deal with the problems involved in restructuring banks this year. Cyprus' government had to seek a rescue loan after it could no longer shoulder the cost of bailing out its banks. An initial agreement with the island's European creditors and the International Monetary Fund sparked market fears since it involved a bank restructuring that would have imposed losses even on deposits covered by Europe's 100,000 euro guarantee. The deal was rapidly overhauled, but holders of large deposits in some banks were forced to take harsh losses.
In the U.S., the Federal Deposit Insurance Corp.'s rules specify that deposits larger than $250,000 might have to take losses in case of bank failures, but Europe still lacks a joint rule.
On Thursday, the finance ministers of the 17 EU countries that use the euro agreed on broad guidelines on how to use the bloc's permanent bailout fund to inject fresh capital into ailing banks as a means of last resort to keep banks from failing.
Enabling the 500 billion euro ($670 billion) rescue fund to shore up struggling banks directly is another long-promised pillar of the banking union.
"It is good news for the eurozone that the ESM will be allowed to recapitalize banks directly," said analyst Marie Diron of Ernst & Young.
"The restructuring of the banking system has been delayed for too long which is one of the reasons why the eurozone cannot grow out this recession the way the U.S. economy has done," she added.
Several finance ministers, however, have cautioned that despite a political agreement on the broad strokes for the new ESM mechanism, many details have yet to be hammered out before it can become operational.
"Given the fact that these steps are not exactly taken at lightning speed, the banking union should be up and running just in time to prevent the next crisis but clearly too late to make a difference in the current crisis," said analyst Carsten Brzeski of ING bank.
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