LUXEMBOURG -- European Union finance ministers struggled Friday to broker an agreement on how best to downsize or close banks without spreading panic or having to call on taxpayers to bail out ailing lenders.
A marathon negotiating session of the EU’s 27 finance chiefs went into the night, seeking agreement on the order in which investors and creditors would have to pay for bank restructurings. A key stumbling block was who to hit hardest: Should losses be limited to banks’ shareholders and creditors, or should small companies and ordinary savers holding uninsured deposits worth more than 100,000 euros ($132,000) also be included?
Two diplomats from different EU countries said that there were still fundamental differences after 12 hours of negotiations.
The most controversial issue was how much leeway member states should be granted in making decisions on winding down banks. Some countries like Britain don’t want to be bound by rigid European rules. Other nations warned that too much flexibility would create new imbalances between the bloc’s weaker and stronger economies and destroy the project of establishing a single set of rules that creates certainty for investors and restores trust in the financial system.
"A lot of countries this morning were asking for more flexibility, so we introduced more flexibility and it had gone too far for some member states," said one of the diplomats, speaking on condition of anonymity to discuss closed-door talks.
An agreement on the rules would be another important step to stabilize Europe’s financial system and establish a so-called banking union, which aims to give the supervision and rescue of banks to European institutions rather than leaving weaker member states to fend for themselves. It is a key part of the EU plans to restore financial and economic stability to the region.
In addition to how much capital a bank must hold, the new European rules would also establish a minimum level of funds -- be it capital, bonds, or deposits -- that banks must have on their books to ensure that there’s always enough privately held assets on which losses can be forced, thus shielding taxpayers from the burden of propping up the bank.
Following the 2008-2009 financial crisis, countries like Ireland, Britain and Germany each had to pump dozens of billions of fresh capital into ailing banks to avoid the financial system from collapsing.
"It’s about ensuring that people in Europe know ... what happens when a bank is being wound down," said Luxembourg’s Finance Minister Luc Frieden.
If the finance ministers reach an agreement on the package, they will then start negotiating the legislation with the European Parliament. If the ministers fail, they would likely schedule another meeting soon. Still, pushing the long-anticipated agreement down the road could undermine confidence in Europe’s ability to repair the financial system.
Europe has already had to deal with problems involved in restructuring banks this year. Cyprus had to seek a rescue loan after it could no longer shoulder the cost of bailing out its banks.
An initial agreement with the island’s European creditors and the International Monetary Fund sparked market fears since it exposed small savers with deposits under the 100,000 euro guarantee to losses.
The deal was rapidly overhauled, but holders of large deposits in some banks were forced to take harsh losses.
In the U.S., the Federal Deposit Insurance Corp.’s rules specify that deposits larger than $250,000 might have to take losses in case of bank failures, but Europe still lacks a common rule.
The new rules being discussed Friday will also foresee the establishment of national bank restructuring funds, which will eventually be merged into a European resolution authority, one of three planned parts of Europe’s banking union.
Another part will be centralized oversight of big banks anchored at the European Central Bank due to be operational next year. But the discussion on the third section, a jointly guaranteed deposit insurance, is only in its early stages.
"The banking union is built brick by brick," stressed French Finance Minister Pierre Moscovici.
At their meeting, the finance ministers also rubber-stamped a seven-year extension of maturities on the bailout loans for Portugal and Ireland, granting the countries more financial leeway.
On Thursday, the finance ministers of the 17 EU countries that use the euro agreed on broad guidelines on how to use the bloc’s permanent bailout fund to inject fresh capital into ailing banks as a means of last resort to keep banks from failing.
Enabling the 500 billion euro ($670 billion) rescue fund to shore up struggling banks directly is another long-promised building brick of the banking union.
Several finance ministers, however, have cautioned that despite a political agreement on the broad strokes for the new ESM mechanism, many details have yet to be hammered out before it can become operational.
"Given the fact that these steps are not exactly taken at lightning speed, the banking union should be up and running just in time to prevent the next crisis but clearly too late to make a difference in the current crisis," said analyst Carsten Brzeski of ING bank.
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