* New law is crucial for bank union to move ahead
* Some uneasy about giving up control over bank rescues
* Failure to reach deal on Wednesday could rattle confidence
By Jan Strupczewski
BRUSSELS, June 24 European Union finance
ministers are under pressure to agree who pays for failing banks
after failing to reach a deal last week, with Germany and France
at odds on how to distribute the costs.
The law on rescuing and closing banks in the EU is central
to the 27-nation bloc's banking union, which aims to prevent
future financial crises and get the economy out of recession.
It is also a highly controversial element as it will dictate
who decides what happens to a failing bank and who is to pay for
it, bringing national sensitivities to the fore.
After talks failed last Friday following almost 20 hours of
talks, EU leaders have asked for a deal on the directive by
Thursday and talks have been scheduled for Wednesday.
Any slippage could further set back the banking union
project, which has been delayed twice because of the complexity
of negotiations between EU governments and institutions.
Ever since banking union started to take shape in mid-2012,
Germany has been wary, concerned that as the currency union's
largest and most powerful economy, it will end up on the hook
for other countries' debts if a single, EU-wide system for
sorting out problems is put in place.
While there is no immediate deadline for an agreement, the
risk of a negative market reaction to another failure has been
growing since the U.S. Federal Reserve made clear that it might
not be printing any more money by this time next year.
Adding to the pressure are rising peripheral euro zone
borrowing costs, which threaten to reignite the sovereign debt
crisis, in abeyance since the European Central Bank declared it
could buy unlimited amounts of bonds.
"Failure to comply with this agenda would cast serious doubt
on the ability of European member states to implement the
banking union on time, and would undermine its credibility, with
possible adverse impacts on bank funding costs," British bank
Barclays said in a research note to clients.
The talks are difficult because the crucial part of the
directive describing who pays for rescuing or closing a bank
will set a model for all future bank rescues or closures in the
EU and become the basis of two other key pieces of legislation.
The first piece - guidelines for the euro zone bailout fund
on saving a bank from collapse - will only become legally valid
when the directive is agreed with the European Parliament.
The ministers cannot even start negotiating with the
parliament unless they agree their own common position first.
The second piece is a law that will go a step further than
the directive by setting up a central EU authority to decide if
a bank must be closed rather than a network of national
authorities as is envisaged under the directive.
BANKING UNION FOUNDATION
This law, called the Single Resolution Mechanism (SRM), is
also to set up a central EU fund fed by bank fees that would pay
for closing a bank -- a task that until then will fall to
national resolution funds, some of which have yet to be set up.
If concrete progress on banking union - originally conceived
of as a three-step process involving a single supervisor, a
single resolution mechanism and a single bank deposit-guarantee
scheme - is put off until after September's German election, the
chances are that nothing will happen until mid-2014 or later.
The broader the possibilities of imposing losses on a bank's
shareholders, creditors or even big depositors in the directive
that will be discussed by EU finance ministers, the less money
the resolution fund would have to contribute to close a bank.
This is an important consideration for bailout-weary euro
zone governments like Germany.
On Wednesday, the ministers will have to decide if they want
the directive to spell out clearly who and in what order should
lose money when a bank is rescued or closed, or should they
leave some discretion on the issue to the bank's home country.
The more discretion granted to a government in deciding the
distribution of costs, the larger the EU bank resolution fund
will probably have to be. This threat has made Germany an
advocate of spelling out all the rules up front.
Ministers will also have to decide on the mininum size of a
bank's liabilities that can be written off when it is rescued,
known as the loss absorbing capacity of a bank.
As with the size of the resolution fund, the more power
individual governments have to decide who pays for the rescue,
the bigger the minimum requirement for own funds and eligible
liabilities (MREL) for write-downs.
The directive proposes that losses in a bank would first be
borne by shareholders, then by junior bondholders, then by
senior creditors and finally, in exceptional cases, by
depositors with more than 100,000 euros ($132,000).
Savers with 100,000 euros or less would have their deposits
guaranteed and would never lose money.
Britain, Sweden and France worry that opening the
possibility of forcing losses on big depositors could cause a
bank run or rattle confidence, and want countries to have
wide-ranging freedom in deciding whether to take such bold
Germany, however, wants strict norms, in the belief that
rules should not vary across the EU because that could put some
banks at a competitive disadvantage.
If agreed, the rules would take effect at the start of 2015
with the provisions to impose losses coming as late as 2018.