EU edges towards banking union, too late for Spain

A Spanish flag flies above the Bank of Spain in Madrid, June 6, 2012. Spain said on Wednesday it was waiting for external auditors to put a final figure on the financial hole in its banking sector before it decides how to fund a rescue. [Photo/Agencies]

BRUSSELS - The European Commission proposed far-reaching powers for regulators to take control of failing banks on Wednesday, a step towards the banking union wanted by the European Central Bank, which will come too late to help Spain.

The plans, which spell out an insolvency regime for banks and empower regulators to intervene to prevent a collapse from triggering panic, first need to be approved by EU countries and the European Parliament and may not take effect until 2015.

This would be far too late for Spain, which could be forced to seek a bailout for its banks if it cannot support lenders saddled with bad property loans and other debt.

"The proposal we have today may be only useful for the future, but it does not solve the current problems we face," said Sharon Bowles, who chairs the European Parliament's economic and finance committee and is one of the most influential officials in shaping banking regulation in Brussels.

"In the short term we need further measures," she said.

The draft law is designed to prevent a repeat of the chaos after the fall of US bank Lehman Brothers in 2008.

But Bowles criticised the delay in announcing the "long overdue" rules, which come almost five years after a collapse in US subprime mortgages started a banking crisis in Europe.

"It's a shame we didn't have this years ago," said one banker, who declined to be identified. "It's not going to help Spain."

They had been held up in part by concerns over the impact on banks' borrowing costs from proposals to force losses on the bondholders of failing lenders.

This would allow supervisors impose a loss on the senior bondholders of a struggling bank from 2018. These lenders came through the banking crisis largely unscathed, compared with the shareholders, who often lost everything.

Some fear this will exacerbate banks' borrowing problems if lenders factor in the risk of default.

The EU executive hopes tighter links between winding-down schemes across the European Union will be the basis of a single resolution fund to close or salvage parts of a troubled bank.

Michel Barnier, the European Commissioner in charge of regulating finance, underscored his support for such a pan-European fund, but hinted at the obstacles it faces by saying "political will" was necessary.

"The door is open to further discussion concerning the mutualisation of funds or putting resolution funds together," he said. "We have to take action. The door has not been closed on a ... European fund."

If it wins the backing of EU member countries and the European Parliament, the law would be a step in the direction of the banking union championed by ECB President Mario Draghi.

Draghi's three-pillar plan for banking union consists of central monitoring of banks, a fund to wind down big lenders and a pan-European deposit guarantee. Although this would apply chiefly to the euro zone, it would affect other EU countries.

"Today's proposal is an essential step towards banking union in the EU and will make the banking sector more responsible," European Commission President Jose Manuel Barroso said.

Hurdles Ahead

There are many hurdles to achieving Draghi's banking union as well as to introducing Barnier's scheme to wind up failed banks.

Britain fiercely resists any attempt by Brussels to impose EU controls over financial services, which account for almost a tenth of its economy. Germany has balked at a single European scheme that could see it bear the costs of a bank collapse in another country.

Other proposals to unify Europe's response to banking crises have hit obstacles.

In 2010, the Commission published a framework for deposit guarantee schemes, but EU member states demanded a cut in the size of the funds to be kept in case of a sudden cash call by savers. That led to deadlock with the European Parliament.

The law proposed on Wednesday would make countries prepare for a bank collapse, collecting money through an annual levy on banks for use in providing emergency loans or guarantees.

It suggests the creation of national funds, equivalent in size to 1 percent of deposits. That money could cover both the wind-down of a bank and any emergency payout to worried savers.

This would mean that backstop funds in the euro zone should, after 10 years, have gathered roughly 70 billion euros ($87 billion) in cash as well as pledges to pay in, according to estimates by the European Commission.

That figure rises to 100 billion euros for the 27 countries in the European Union as a whole.

Allowing countries to dip into the funds both for deposit protection as well as winding down a bank has angered some legislators in the European Parliament, who want a bigger warchest.

"I can't understand the Commission's proposal of 1 percent to cover both bank resolution and deposit guarantees," said Peter Simon, a German lawmaker who led negotiations on behalf of the Parliament with countries to broker a compromise on deposit guarantees.

"So far they said 1.5 percent was a minimum needed just to reimburse depositors in case of a medium-sized bank crash. One third less for both funds is not credible."

Nicolas Veron of Brussels think-tank Bruegel said the delays in proposing a framework for failing banks underlined the European Union's difficulty in getting to grips with the crisis. "But the situation is so serious now, that decisions could be taken." ?

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