Leaders set timeline for bank resolution fund

European Union leaders took a small step at the summit towards tackling the most difficult issues facing Europe’s struggling banking sector, by setting out a timeline for how this should be achieved.

One point of disagreement is who will recapitalise any weak banks identified by the European Central Bank (ECB), which will begin reviewing the financial health of the eurozone’s largest banks in November. There are concerns that the ECB may uncover large losses that have not yet come to light. EU leaders have instructed their finance ministers to iron out the details by the end of November, ahead of the next European Council, on 19-20 December.

They are likely to use that summit to finalise member states’ position on the single European resolution fund for stricken banks, proposed by the European Commission in September. The Council said it would adopt a general position on the plan by the end of this year. That would allow for negotiations with the European Parliament, which has yet to agree its stance, with the objective of adopting the legislation by the end of April 2014.

EU leaders also called for two other important pieces of banking union legislation to be in place before the end of the year – the bank recovery and resolution directive, and the deposit guarantee directive.

But the summit conclusions say that member states should rely on their own funds to recapitalise failing banks, seemingly ruling out the possibility of using eurozone funds directly without imposing the cost of any rescue on their home countries. Eurozone finance ministers stressed in June 2012 that breaking the link between eurozone banks and the finances of the member states in which they are based, which in the past have been forced to provide crippling rescue packages, is crucial for restoring confidence in the banking sector and the wider EU economy.

Some member states, led by Germany, opposed arguments from France, Spain and others in favour of direct bank recapitalisation as they do not want eurozone funds to be used to mask the past shortcomings of national regulators.

EU banking union would bring the EU’s largest banks under the surveillance of a single EU banking supervisor, with a single resolution fund empowered to rescue or wind up stricken banks. Direct bank recapitalisation will be possible in some form once such a supervisor is in place.

But, in a sign of the divisions between EU leaders, François Hollande, France’s president, seemed to refer to EU funds being made available before the European supervisor is in place. He said that “national and European backstops” would be in place in time for the conclusions of the ECB’s asset quality review.

Mario Draghi, the president of the ECB, explained to EU leaders over dinner on Thursday how the review of eurozone banks would work. In the past he has emphasised that the credibility of the review will depend in part on whether member states have managed to agree on a credible bank rescue plan.

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