Berlin demands treaty change for bank reforms

A banking union only makes sense if mechanisms for the restructuring and resolution of banks are in place

By Alex Barker

Germany laid down a big barrier on the fast track to European banking union, insisting a revision of EU treaties is necessary to create a single authority to wind up banks, even if it took several years to accomplish.

Wolfgang Schäuble, the German finance minister, strongly voiced his legal concerns at an informal meeting of EU finance ministers Dublin over the weekend. His comments point to the high political stakes involved in forging a common institution to shut down troubled financial groups.

His intervention in Dublin was a shot across the bows of the European Commission as it prepares to publish a blueprint for the resolution reforms in June – as well as a reality-check for reformers pushing for the full banking union framework to be agreed in the coming 12 months.

By throwing his weight behind the need for a treaty revision in the medium term, Mr Schäuble also raised Britain’s hopes of opening a path to an eventual repatriation of powers from the EU.

George Osborne, the UK finance minister, made clear that Britain’s backing for treaty change would come at a price. “That sent a chill around,” said one person in attendance.

The controversial bailout of Cyprus - which included haircuts for depositors - brought new urgency and extra scrutiny to the longstanding EU reform-drive on resolution, which aims to shift the burden of handing failed banks from taxpayers to creditors.

Year-old proposals for new national resolution tools are still to be agreed. But Mario Draghi, the European Central Bank president, also sees the more ambitious common resolution system – with a single fund and independent decision making powers – as an essential foil to the single bank supervisor, whose work he will oversee from 2014.

Under the current EU treaties the legal options for pooling such important decision making within a single authority are limited. Such reforms also require a huge sacrifice of sovereignty over a decision that presents toxic political choices: when should a troubled bank be wound up and who should foot the bill?

During a debate among finance ministers, Mr Schauble forcefully warned against raising market expectations over the pace of banking union reforms and said his lawyers concluded the creation of a single resolution authority would not be legal under current treaties.

“A banking union only makes sense if we have mechanisms for the restructuring and resolution of banks,” Mr Schauble said after the meeting. “But if we want these European institutions, we need treaty changes.”

As a stop-gap arrangement, Berlin backs the creation of a European body to coordinate between national authorities when shutting down a cross-border bank – an alternative that senior EU officials argue will not be enough to face up to the task.

Michel Barnier, the EU commissioner responsible for the banking union reforms, told ministers a centralised single authority was essential. “It is possible to do this rapidly within the framework of the current treaties,” Mr Barnier said after the debate.

France, Luxembourg, Denmark and the Netherlands were among those backing the rapid completion of a banking union, according to one person at the meeting.

The ECB’s perspective was voiced by Jorg Asmussen, an ECB executive board member: “It is key that we now move on swiftly to agree all elements of the banking union... We need a single resolution authority and a privately funded European resolution fund.“

Veterans of the talks on a single bank supervisor noted it was not the first time Mr Schäuble had made bold statements on the need for treaty change. “It may be crying wolf again,” said one participant in the resolution debate. Others also pointed out that Angela Merkel, the German chancellor, had appeared more convinced that progress should be made under existing EU law.