Fund fight

EU Fails to Please All Bankers All the Time

barnier_reuters
Small banks will only have to pay a little bit, says Mr. Barnier.
  • Why it matters

    Why it matters

    Taxpayers largely footed the bill when several European banks collapsed during the 2008 financial crisis. But E.U. countries now want banks to cover the costs of any future closures.

  • Facts

    Facts

    • Europe is setting up a €55 billion ($70 billion) fund to cover the costs of future bank collapses.
    • Under the latest proposals, big banks will pay at least 90 percent of the costs.
    • Smaller lenders will pay a flat-rate contribution of between €1,000 and €50,000.
  • Audio

    Audio

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The European Commission yesterday finally laid out its proposals for who should pay for any future collapse of financial institutions, the cause of a bitter battle between small and large banks. Its plan? Share the burden and go easy on both small and large banks.

The legislative proposals presented by Michel Barnier, the European Union internal market commissioner, outline how the taxes E.U. banks must pay into the so-called European bank liquidation fund will be calculated.

Lenders will be required to pay a total of €55 billion ($70 billion) into the fund by 2024, and it will be used to pay for the costs of winding up any banks that may fail. The idea is to protect taxpayers from having to bail out banks, as was the case during the 2008 financial crisis.

But the way the burden is to be distributed has been hotly debated, with small banks complaining that their contributions were likely to be proportionately larger than the big banks under the first draft proposals. This led Mr. Barnier to have a rethink, causing a month-long delay.

Under the proposals, the large banks would shell out the lion’s share for the fund. The institutions that account for 85 percent of all bank assets in the E.U. are to pay at least 90 percent of the total contribution to the liquidation fund, the Commission says.

Under the proposals, the large banks would shell out the lion's share for the fund.

Small banks will get away more lightly. Under Commission rules, a bank is labelled as small if it has total assets of less than €1 billion and its basis of assessment – total assets minus equity capital and covered deposits – is below €300 million. Banks falling below these two thresholds would contribute a lump sum of between €1,000 and €50,000 a year to the fund.

Private banks in Germany, which has a large network of small banks, are welcoming the arrangement. The Commission has “not forgotten small and mid-sized private banks, which really have to fight to prevail in the market,” says Michael Kemmer, general manager of the Association of German Banks.

The plan calls for additional relief for of savings banks and cooperative banks. Their contributions to the fund will be offset by their payments into joint system of institutional protection. The fact that they are jointly liable for each other’s debts will also be taken into consideration.

Georg Fahrenschon, president of the German Savings Bank Association, was pleased with the news. He said that compared with the first proposals from the European Commission, the new draft legislation represented “substantial relief for the institutions that are part of the joint liability scheme of the savings bank financial group.”

Nevertheless, he isn’t completely satisfied. In fact, he believes savings banks should have been exempted from contributing to the liquidation fund. “The fee is and remains an unjustified burden for institutions that will never take advantage of the fund,” Mr. Fahrenschon said.

“The fee is and remains an unjustified burden for institutions that will never take advantage of the fund.”

Georg Fahrenschon, President, German Savings Bank Association

In recent months, German finance minister Wolfgang Schäuble had also called for an exemption for small banks. But this proved to be unrealistic.

Even so, future negotiations in the council of E.U. finance ministers, who must agree the proposals, will likely still revolve around how many banks qualify for the low flat-rate contributions. Mr. Schäuble may attempt to push up the current thresholds for total assets and assessment limit.

If he does, he will encounter fierce resistance from France, whose banking system comprises a small network of large banks rather than lots of small ones as in Germany. Under Mr. Schäuble’s plan, large French banks would have to cover the cost of contributions that would otherwise have been made by small German banks. The government in Paris is already deeply concerned that the contribution to the European liquidation fund will be too much for the country’s big banks.

German members of the European Parliament, which must also sign off the proposals, hold a very different view. The European Commission has watered down the risk surcharge for the very large banks, those considered “too big to fail,” which benefits France more than any other country, says Markus Ferber, a lawmaker with Germany’s conservative Christian Social Union (CSU).

Green Party European Parliament member Sven Giegold also believes that more emphasis should be placed on the risks posed by major banks. “The fact that the contributions increase in proportion to total assets benefits the large universal banks, while medium-sized banks with a low-risk business model are penalized,” he said.

 

The author is Handelsblatt’s bureau chief in Brussels. To contact the author: Berschens@handelsblatt.com

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