September 29, 2017 / 12:00 PM / 2 months ago

In post-Schaeuble era, EU pushes to set up bank fund backstop

BRUSSELS (Reuters) - European Union regulators urged on Friday that the bloc quickly set up a backstop for its bank-rescue fund, a move that Germany’s departing finance minister has resisted for years.

The EU’s bank-financed rescue fund for failing lenders, the Single Resolution Fund (SRF), was set up as part of a banking union plan during the euro zone’s decade-long financial and economic crisis.

It currently stands at around 17 billion euros ($20 billion), but that is not considered enough to cope with a larger banking crisis.

“The Commission considers it very important to quickly move to a sufficiently large and readily available common backstop” for the SRF, the vice president of the EU executive, Valdis Dombrovskis, told a banking conference.

He said the commission will soon offer “new ideas” on the issue and on how to break a years-long deadlock blocking the completion of the banking union, which would also require establishing a common insurance scheme for European depositors.

The stalemate was partly caused by German scepticism. Wolfgang Schaeuble, Germany’s finance minister since 2009, has resisted the bank backstop and the depositor insurance, fearing German resources would be used to shore up weaker banks in other European states.

But Schaeuble will soon step down, opening the way for a compromise, European diplomats said, although it remains to be seen where the new German government will stand on the issue.

To reach a compromise, EU states with weaker banking systems, like Italy, may need to offer more concessions, to further reduce risks posed by lenders saddled with bad loans or holding too much domestic sovereign debt.

POPULAR CASE

The need to set up a bank backstop was highlighted by the rescue in June of Spain’s Banco Popular, the first case in which EU regulators applied new rules to deal with banking crisis.

The bank rescue fund could have been used to shore up Popular, if needed, the chairwoman of the Single Resolution Board, Elke Koenig, said on Friday.

But that would have cost 7 billion euros, an intervention that “would have basically evaporated the large part of our fund at that point in time,” Koenig said.

Eventually, Banco Popular was sold for the nominal price of 1 euro to Santander (SAN.MC), guaranteeing its operations could continue without financial support from the SRF.

Koenig added that the fund is currently well-capitalised, but it probably could not provide enough liquidity to a large systemic bank in the event of a broader banking crisis.

“We are working on a backstop and we need a backstop,” she said.

Under EU rules, the fund can be used only after an ailing bank’s shareholders, bondholders and depositors have covered a significant part of its losses.

Reporting by Francesco Guarascio @fraguarascio; editing by Foo Yun Chee

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