FRANKFURT (AP) ― European Central Bank President Mario Draghi said it was “imperative” that Europe’s leaders create a new agency with powers to restructure busted banks in order to help the region leave its economic and financial crisis behind it once and for all.
In the text of a speech to be delivered in London Thursday, Draghi said the new agency would keep troubled banks from burdening governments through bailout costs ― thereby cutting the vicious link that has helped drive Europe’s three-year crisis over too much debt.
The agency, dubbed the single resolution mechanism, would be able to force banks creditors and shareholders to take losses first when a bank goes under ― instead of getting the money from taxpayers. European leaders have made a start on strengthening their banking system by agreeing to put the ECB in charge of supervising banks. But they have not yet agreed on how to proceed with the resolution mechanism.
Together with a Europe-wide deposit guarantee scheme, these three measures would form the European Union’s banking union ― a key part of the 27-country bloc’s strategy to combat its financial crisis.
Graffiti depicting ECB president Mario Draghi and German Chancellor Angela Merkel is shown on boards outside the construction site of the European Central Bank’s new headquarters in Frankfurt on Wednesday. (Bloomberg)
Putting the ECB in charge of banking supervision was a first step that “will pave the way towards severing the link between banks and their respective sovereigns,” Draghi said in the text of the speech to be given at the Guildhall in the City of London.
“But to sever this link completely, it is also imperative to create a single resolution mechanism.”
Fears about banks have helped drive Europe’s crisis over too much debt. Spending huge amounts of money to rescue banks can pile more debt on governments, something they feel forced to do because banks are essential to keep the economy going. Banks in turn can find it hard to raise funds if markets think they will suffer losses on government bonds they hold.
Individual countries’ banking regulators are considered to be too reluctant to act forcefully to halt problems with their home banks, and can face added problems when a bank’s activities cross national borders. That has led to calls for a centralized EU approach that would take the financial burden and much of the regulatory responsibility, especially for big banks, away from national officials.
When it becomes Europe’s banking supervisor, the ECB will have the power to yank banks’ licenses. But the job of taking action over a failed bank would remain with the resolution agency. It could write off what the bank owes to its creditors, known as a bail-in, or convert those debts into shares in a restructured bank, for instance. That would find money to get the bank’s lending activity going again without tapping the public treasury and making taxpayers pay.
The idea has run into resistance from Germany, the eurozone’s biggest economy. Minister Wolfgang Schaeuble has said such a central resolution authority would require changes in the basic treaty governing the EU in order to have a safe legal basis. That could take years.