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July 9, 2013, 6:08 p.m. ET
European Commission Seeks Authority to Wind Down Banks
By TOM FAIRLESS And STEPHEN FIDLER
BRUSSELS — The European Commission will propose itself as the single authority for winding down banks in the euro zone, a step that will set the European Union's executive on a collision course with the bloc's most powerful member, Germany.
Berlin insists that such an authority—whose actions could force national governments to spend money to help rescue failed banks—would breach EU treaties. That, it says, could lead to legal challenges over bank restructurings and create uncertainty for financial markets at a sensitive time.
Michel Barnier, the EU commissioner responsible for financial-market regulation, was to lay out his final proposal Wednesday for a so-called single resolution mechanism, giving it the authority to restructure or close any of the 6,000 banks in the 17-nation euro zone that hit financial problems.
Bank restructurings currently take place under a patchwork of national rules, which also hinder the winding down of cross-border banks.
The euro-zone's ambitious banking union project—a cornerstone of efforts to end the three-year-old debt crisis—aims to break the vicious link between struggling euro-zone banks and their governments.
The first pillar is a single supervisor for euro-zone banks, a task the European Central Bank is expected to assume in the fall of 2014. The single resolution mechanism is meant to form the second pillar.
The commission calls for a so-called "single resolution board" to prepare and carry out bank restructurings, backed by a shared fund that would be financed by contributions from banks.
The board would comprise representatives of national resolution authorities, the commission and the ECB. Its chief and deputy would be appointed by national governments.
National resolution authorities would be in charge of implementing the board's decisions at a local level—but, crucially, the commission alone will decide whether and when to place a bank in resolution.
A senior commission official said that it was "extremely unlikely" that the commission would challenge national authorities and the ECB by overturning board recommendations.
The German Finance Minister Wolfgang Schäuble said Tuesday that a single authority risked contravening the EU treaty, which limits the power of Brussels over national finances.
"As long as we will not be able" to have "an amendment to the treaty, we have to stick to the legal basis we have," he said. "Otherwise, we will fail and we will create new uncertainty in markets."
Instead, Berlin favors taking a first step of creating a network of national resolution authorities.
German officials have said they are open to amending the treaty to allow a single authority to be formed—but some opponents see this as a delaying tactic, since completing treaty change is a fraught and time-consuming process.
"Whoever wants more must engage with the German government about treaty change," Mr. Schäuble said.
German officials also argue that the commission's existing regulatory and other roles make it vulnerable to conflicts of interest.
Commission officials argue that leaving bank restructurings in the hands of national authorities would leave them prey to government and industry pressure.
The commission says that legally only an EU institution can wield such powers, and that the alternatives to the commission look worse.
One would be the ECB, which would be conflicted if it were tasked with winding down the banks it was supervising (It is starting off as direct supervisor of only about 250 of the most important euro-zone banks, out of about 6,000).
Other institutions, such as the European Parliament, would likely be too slow and have no expertise.
Some commission officials consider the role as a poisoned chalice, given the potential it has for generating bitter conflicts with national capitals. The proposal will be followed by negotiations among governments, which must then reach agreement with the European Parliament.
The proposed single resolution fund would be built up over time by contributions from banks, and eventually replace national resolution funds. Its target size would be 1% of banks' covered deposits, or around €55 billion, based on 2011 data. It will, however, take 10-14 years before such a fund would have sufficient resources, commission officials said.
EU finance ministers agreed last month on a plan to force bank creditors and large depositors to take losses in case of bank failures—rather than have the banks bailed out by national governments. The proposed single resolution authority would operate based on these principles.
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