A meeting this week in Brussels resulted in a spat between Germany’s Finance Minister Wolfgang Schaeuble and ECB Executive Board member Joerg Asmussen, as momentum towards a European Banking Union increases. Asmussen vocalized the necessity for a central backstop for failing banks via a banking union by next summer, with Germany’s Schaeuble maintaining the country’s position on changing current treaties.
Also discussed was the potential “pecking order” in the case of bank failures. Disagreement reigned over whether or not depositors or creditors should receive preference on ‘bail-in’ rules. In other words, when a bank experiences trouble, Asmussen and Schaeuble expressed preference for depositors facing losses first, with the U.K.’s Chancellor of the Exchequer George Osborne worried that this would unfairly impact pension managers. Spain’s Economy Minister Luis de Guindos sided with Osborne, noting that retail accounts insured by the EU for as much as 100,000 euros would suffer if the burden was on depositors.
There was also talk of future rules in the arena of bank failures, as Osborne advocated the U.K.’s method of absorbing the costs after the fact, rather than having a premeditated fund in place for dealing with such situations. He felt such a fund would be “totally useless” in the case of his own country, and attempted to steer discussion in this direction as the EU plans requirements for national funds for banks.
Despite Schaeuble and Asmussen’s agreement with regards to depositor preference, the German Finance Minister said that money for failing banks will not come from a single euro zone pool until decision-making is centralized. Schaeuble is attempting to protect German interests, and the bail-out weary nation seeks to safeguard itself from having to bear the brunt of financial failures for European banks. However, some nations want to leave leeway for domestic regulators to handle crises on their own, allowing provisions for certain exemptions to be made to unsecured bank creditors on a case-by-case basis.
The European Commission finds this approach to be dubious, though. Olivier Guersent, head of cabinet for Michel Barnier the EU’s financial services chief, felt that domestic freedom for regulators could lead to a situation where “wealthy member states could exclude a lot of things, but not-so-wealthy member states will not be able to afford [this]. There you will create a very unlevel playing field. Guess where depositors will prefer to put their money. Where they are likely to be excluded or where they are likely to be included.”
Finance ministers meet again in June to discuss bank resolution rules.