Euro zone ministers agree on backstops for financing bank closures

BRUSSELS Wed Dec 18, 2013 8:31am IST

A European Union (E.U.) flag flutters in front of the monument of Parthenon on Acropolis hill in Athens June 17, 2012. REUTERS/John Kolesidis

A European Union (E.U.) flag flutters in front of the monument of Parthenon on Acropolis hill in Athens June 17, 2012.

Credit: Reuters/John Kolesidis

BRUSSELS (Reuters) - Euro zone finance ministers agreed early on Wednesday how to ensure financing for closing down banks in a deal that boosts chances of an agreement on the overall blueprint on dealing with failing lenders later on Wednesday.

The deal is part of European Union efforts to build a banking union in which bank supervision is shared at the EU level and so is the financial responsibility for winding down lenders that are no longer viable.

The final agreement on all aspects of closing down banks, for example, who will decide which bank is to be shut down and the procedure to be followed, is to be hammered out by European Union finance ministers, or the Ecofin council, on Wednesday.

"Tonight we produced a crucial breakthrough in the building of a banking union for Europe. This will pave the way for an overall compromise in the Ecofin council," EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters.

Banks will provide the cash to pay for the closure of failed lenders, giving roughly 55 billion euros ($76 billion) over 10 years accumulated in a Single Resolution Fund.

Until then, however, if there is not enough money from the fees, governments will be able to impose more levies on banks. If that does not suffice, they would help with public money.

If a government would not have enough money, it could borrow from the euro zone bailout fund ESM, like the Spanish government did to recapitalize its banks in 2012, according to the deal reached by euro zone finance ministers.

"In the transitional period, bridge financing will be available either from national sources, backed by bank levies, or from the ESM, in line with agreed procedures," a draft statement by euro zone finance ministers said.

This is a victory for Germany which was reluctant for euro zone countries to share the costs of winding down banks elsewhere in the euro zone for as long as possible.

After the build-up phase in 2025, when the Single Resolution Fund (SRF) is full, additional money for emergency financing could be raised by the SRF itself through borrowing, the draft euro zone ministers' agreement said.

"A common backstop will be developed during the transition period. Such a backstop will facilitate the borrowings by the SRF. The banking sector will ultimately be liable for repayment by means of levies in all participating Member States, including ex-post," the statement said.

(Reporting By Jan Strupczewski, Martin Santa and Annika Breidthardt)

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