Germany’s finance minister suggests two-step bank union

BERLIN - The Associated Press

German Finance Minister Schaeuble says EU treaties provide a foundation for the new single banking supervisor but not for a central resolution authority. AFP Photo

Europe shouldn’t rush to establish a central authority to wind up failing banks, but should rely at first on cooperation between national agencies, according to Germany’s finance minister who has called for a “two-step approach” towards European banking union.

Setting out how to shut failed banks is one aspect of a banking union meant to stabilize the financial system among the 17 European Union countries that use the euro.

Officials from the European Central Bank have called for the establishment of a strong central authority backed by the financial firepower of a European fund to make decisions on unwinding banks. Berlin, however, has argued that setting up such an authority would require changing European Union treaties - a potentially cumbersome and time-consuming process.

Finance Minister Wolfgang Schaeuble wrote in yesterday’s Financial Times that Germany will assess “with an open mind” a proposal being prepared by the European Commission, the EU’s executive arm, for the creation of a mechanism to deal with failing banks. He warned that existing EU treaties “do not suffice to anchor beyond doubt a new and strong central resolution authority.”

A single banking supervisor

“We should not make promises we cannot keep,” Schaeuble wrote. He said initial predictions that a single European banking supervisor - the core of the banking union - could start work at the beginning of this year “cost the EU credibility.” Germany was adamant that the supervisor shouldn’t be rushed either; it is now expected to start work next year.

Schaeuble argued that when a bank is wound up, money and jobs are usually lost, prompting those affected to seek redress - meaning that a new European authority would need a solid legal base.

“Amending the treaties takes time,” he wrote. “Luckily, the alternative is not between a legally shaky resolution authority now and the postponement of repair work on the banks.”

Schaeuble said a mechanism based on a network of national authorities could start work once a European banking supervisor is operating. He said it would rely on national funds instead of a single European resolution fund, “which the industry would take many years to fill.”

The result “would be a timber-framed, not a steel-framed, banking union,” but that would buy time to create the legal basis for a more ambitious project with strong central authorities, Schaeuble said.