BRUSSELS European Union leaders discussed broad measures to stem the fallout from a winding up or restructuring of bad banks on Wednesday, EU officials said, with the European Central Bank pressing for the bloc to stand behind its struggling lenders.
At the heart of the discussion are proposals from the European Commission for a legal framework to wind up or reorganize insolvent banks so as to avoid a repeat of the multi-trillion-euro taxpayer bailouts during the financial crisis.
The issue of bank resolution has risen to the top of the agenda as concerns grow about the impact if Greece were to leave the currency zone, and as problems deepen in Spain's large banking sector, which is laden with bad property debts.
Officials said among the issues EU leaders were discussing was whether it might be necessary to establish a taskforce to look in more detail about bank resolution issues, and to examine related steps such as what legislation and fiscal steps would be necessary to lay the ground for euro zone bonds.
"There's some discussion about how to use the mandate given to EU leaders back in December," said one EU source, saying the European Council President Herman Van Rompuy or European Commission President Jose Manuel Barroso could be given responsibility for setting up the taskforce.
The source added, however, that any move would depend on EU leaders agreeing and German Chancellor Angela Merkel's approval was far from guaranteed.
The basis of the leaders' talks are detiled proposals the European Commission is scheduled to present in early June on how to take control of failing banks, merge bad ones with sound ones and impose losses on bank bondholders.
The European Central Bank wants the proposals to include a pan-euro-zone resolution fund for larger, systemically important banks, a message its President Mario Draghi intended to deliver to leaders on Wednesday, a central bank source said.
"There are a series of issues covering bank resolution, a debt agency for euro bonds and the financial sector in general that leaders are working on," said the first source when asked about how wide-ranging the talks were.
"When it comes to the banking sector, the debate really focuses on whether they want to broaden the ideas out or keep them narrowly focused."
Aside from bank resolution, there are calls from some EU countries to make it possible for the euro zone's bailout funds to directly recapitalize banks, rather than having to lend to the sovereign which then on-lends to the banking sector.
Germany is opposed to direct recapitalization, but one official said there was some backing for the idea.
"There is more momentum behind these kinds of issues such as using the European Stability Mechanism to directly recapitalize banks and the idea of federalizing Europe's response to the banking crisis," the official said.
The proposal for a central euro-zone fund to neutralize any knock-on effects from the closure or overhaul of a struggling bank is one of the most contested issues in the debate about winding up lenders.
Earlier this week, ECB policy maker Joerg Amussen referred to the need for the creation of further funds beyond the ESM, a reference one official said referred to the requirement for new facilities to finance and recapitalize banks directly.
"We should have tools to prevent banks runs and to force (bank) restructuring," said a third EU official. "For bank crisis management, it would make sense. But it is more of a political question."
Although some believe that a central resolution fund could play a role in making the banking sector "shock-proof", in the words of the official, Germany still has reservations about supporting flagging banks in countries such as Spain.
"It means metallization of risks and that is a problem for several countries," said the official.
Any such fund would also require giving further powers of enforcement to European authorities such as EU regulator, the European Banking Authority, or the European Central Bank.
"If you create bank resolution funds without European level powers to impose structural changes, then you use funds but you don't have a central to force the banking sector to reorganize."
(Reporting By Luke Baker and John O'Donnell)