Europe tempers power of agency to shut troubled banks

Wed Jul 10, 2013 5:46am EDT
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By John O'Donnell

BRUSSELS (Reuters) - The European Commission proposed on Wednesday creating an agency to salvage or shut failed banks, but the absence of an immediate backstop fund to pay for a clean-up means it may struggle to do its job.

Working in tandem with the European Central Bank as supervisor, the new authority is supposed to wind down or revamp banks in trouble. It constitutes the second pillar of a 'banking union' meant to galvanize the euro zone's response to the crisis.

If agreed by European Union states, the agency will be set up in 2015 and will eventually have the means to impose losses on creditors of a stricken bank, according to the blueprint.

But the new authority will be handicapped by the fact that it will have to wait years before it has a fund to pay for the costs of any bank wind-up it orders. In practice, this means it could be very difficult to demand any such closure.

Officials say the plan foresees tapping banks to build a war chest of 55 billion to 70 billion euros ($70 billion to $90 billion) but that is expected to take a decade, leaving the agency largely dependent on national schemes in the meantime.

"We have also seen how the collapse of a major cross-border bank can lead to a complex and confusing situation," said Michel Barnier, the commissioner in charge of regulation.

"We need a system which can deliver decisions quickly and efficiently, avoiding doubts on the impact on public finances, and with rules that create certainty in the market."

The EU's executive will also not, however, call for giving a backstop role to the euro zone's rescue fund, the European Stability Mechanism.   Continued...

File picture shows the Euro currency sign in front of the European Central Bank (ECB) headquarters in Frankfurt April 4, 2013. REUTERS/Lisi Niesner/Files