* Deadlock broken on final pillar of banking union
* New agency to be set up to shut banks with back-up fund
* ECB's Draghi says fund's ability to borrow looks promising
(Adds Draghi comments, detail)
By John O'Donnell and Tom Körkemeier
BRUSSELS, March 20 Europe took the final step to
complete a banking union on Thursday with an agency to shut
failing euro zone banks, but there will be no joint government
back-up to pay the costs of closures.
The breakthrough ends an impasse with the European
Parliament, which persuaded euro zone countries to strengthen
the scheme. It completes the second pillar of banking union,
which starts at the end of the year when the European Central
Bank takes over as watchdog.
The accord means that the ECB has the means to shut banks it
decides are too weak to survive, reinforcing its role as
supervisor as it prepares to run health checks on the still
ECB President Mario Draghi said that plans to allow the new
'resolution' or clean-up fund to borrow to top itself up looked
promising and that the decision-making scheme to shut a bank had
"The point we've always made that we need a mechanism that
is properly funded and the agreement actually improves the
existing funding," Draghi told journalists as he entered a
meeting of European Union leaders.
"All in all we made progress for a better banking union."
Michel Barnier, the European commissioner in charge of
regulation, said the scheme would help to bring "an end to the
era of massive bailouts".
"The second pillar of banking union will allow bank crises
to be managed more effectively," he said.
Thursday's agreement makes it harder for EU countries to
challenge the ECB if the central bank triggers bank closures,
and establishes a common 55 billion euro back-up fund over eight
years - quicker than planned but far longer than the ECB's
watchdog had hoped.
But the new system, which Barnier conceded was not
'perfect', has shortcomings.
For one, the 'resolution' fund is small and would, in the
view of the ECB watchdog, be quickly spent. To remedy that the
fund will be able to borrow to replenish spent money.
Euro zone governments will not, however, club together to
make it cheaper and easier for it to do so.
The 18 euro zone countries do not intend to cover jointly
the cost of dealing with individual bank failures, a central
tenet of the original plan for banking union.
Germany resisted pressure from Spain and France to make such
a concession. Its finance minister Wolfgang Schaeuble welcomed
new rules forcing bank creditors to take losses and that "the
mutualised liability ... remained ruled out" - a reference to
sharing the burden of a bank collapse.
Neither will there be any joint protection of deposits.
Almost seven years since German small business lender IKB
became Europe's first victim of the global financial crisis, the
region is still struggling to lift its economy out of the
doldrums and banks are taking much of the blame for not lending.
The banking union, and the clean-up of banks' books that
will accompany it, is intended to restore their confidence in
one another. It is also supposed to stop indebted states from
shielding the banks that buy their bonds, treated in law as
'risk-free' despite Greece's default in all but name.
Under the deal reached, a fund made up by levies on banks
will be built up over eight years, rather than 10 as originally
foreseen. Forty percent of the fund will be shared among
countries from the start and 60 percent after two years.
It also envisages giving the European Central Bank the
primary role in triggering the closure of a bank, limiting the
scope for country ministers to challenge such a move.
Mark Wall, Deutsche Bank's chief euro zone economist, said
new rules to impose losses on the bondholders of troubled banks
would reduce the burden on the fund but warned that its size was
too modest. "A cross-European fund of the size of 55 billion
raises some eyebrows in terms of scale," he said.
The fund will be able to borrow against future bank levies
but will not be able to rely on the euro zone bailout fund to
raise credit. Critics say this means primary responsibility for
problem lenders remained with their home countries and that the
banking union will never live up to its name.
"The key to the banking union is an authority with financial
clout. They don't have it so we don't have a banking union,"
said Paul De Grauwe of the London School of Economics.
"The whole idea was to cut the deadly embrace between bank
and sovereign. But if a banking crisis were to erupt again, it
would be back to how it was in 2008 with every country on its
Carsten Brzeski, an economist at ING, said the
decision-making process to shut a bank was too complicated and
The fragility and politicized nature of Europe's banks has
been highlighted by ailing Austrian state lender Hypo Alpe Adria
Vienna will sponsor a bad bank to isolate roughly 18 billion
euros of bad loans extended by the bank after Joerg Haider, the
far-right politician who governed its home province, earlier
ramped up its activities.
Despite the bank's impact on national debt, many politicians
feel Austria has little choice. Were banking union in place, the
situation would be little different.
(Additional reporting by Martin Santa and Jan Strupczewski in
Brussels; Editing by Catherine Evans and Susan Fenton)