(Repeat for additional subscribers)
Dec 20 (The following statement was released by the rating agency)
The agreement on a general approach to a Single
Resolution Mechanism (SRM) supports Fitch Ratings' view that there is a strong
consensus for eurozone reform to deepen economic and monetary union, but
breaking the link between banks and their domestic sovereigns remains a remote,
The agreement is a step towards banking union, and can boost long-term
confidence in the stability of the eurozone. However, the size of the resolution
fund, the time it will take to be fully funded, and the slow pace of
mutualisation limit its capacity to fulfil the aim, first outlined in June 2012,
of breaking the link between sovereigns and banks. However, the combination of
debt that can be bailed in and the resolution fund should reduce future
contingent liabilities for sovereigns.
The agreement on 18 December was reached ahead of a self-imposed year-end
deadline. This was to boost the chances of agreeing the SRM regulation before
next May's European Parliamentary elections. The agreement would see bank
levies used to fund a single resolution fund that "would initially consist of
national compartments that would be gradually merged over ten years". National
contributions would build the fund up to EUR55bn in that time. A single
resolution board would be set up "with broad powers in cases of bank
A EUR55bn fund would help resolve individual bank failures privately, especially
as there is a minimum bail-in requirement of 8% of liabilities before resolution
funds can be used. (The ability to bail-in senior unsecured creditors from 1
January 2016 instead of 1 January 2018, as originally proposed under the final
Bank Recovery and Resolution Directive, was agreed earlier this month).
Nevertheless, during the build-up, and even when the fund reaches its target
size, the committed funds would be too small to cope with a systemic eurozone
banking crisis. Eurogroup and ECOFIN Ministers acknowledged that "situations may
arise when the is not sufficiently funded by the banking sector,
especially in the initial period but also in the steady state." There are
therefore plans to develop a common backstop, fully operational after at most
ten years, which would enable the fund to borrow and be reimbursed through
banking sector levies "including ex-post".
Wednesday's agreement says that the single resolution fund would be back-stopped
in its initial phase by bridge-financing from national sources, backed by bank
levies, or from the European Stability Mechanism, according to existing
procedures." In our view this implies that the EUR60bn of ESM funds earmarked
provisionally for bank recapitalisation would be lent to their sovereigns,
rather than injected directly into troubled banks.
In the absence of detailed plans to backstop the fund, the potential costs of
bank support will continue to be a factor in our eurozone sovereign ratings.
The Council can object or call for changes to the single resolution board's
decisions, which themselves may require input from representatives of member
states and approval by board members representing at least 50% of contributions
to the fund. This may delay decisions on bank resolution and leave them subject
to national political considerations.
The Council of the European Union said Wednesday that agreement had been reached
on a draft SRM regulation and that eurozone members had committed to negotiating
an intergovernmental agreement on the functioning of a single resolution fund by
1 March 2014. If agreed with the European Parliament, the SRM would come into
force on 1 January 2015.