First Published: Tue, Oct 15 2013. 08 05 PM IST
EU finance ministers agree on new bank supervisor system
The single supervision mechanism is meant to prevent any repeat of the financial meltdown which plunged Europe into crisis
As the debate twists and turns, an immediate practical issue concerns “backstop arrangements” to pay for potential bank closures until the SRM begins its work, most likely in several years.
One option being discussed is to tap the European Stability Mechanism (ESM), the €500 billion eurozone bailout fund which has been used to help Spanish banks.
However, it is unclear how this would work in practice and especially if a member state seeking such ESM help would also have to accept tough economic policy conditions as in the full bailouts accorded Greece, Cyprus, Ireland and Portugal.
Sweden’s Anders Borg said ministers “first and foremost must clarify backstops” before the ECB completes tough asset tests on the banks next year to pave the way for the supervisory mechanism to begin its work.
The stress tests, which are supposed to be much tougher than previous reviews, should give a clear indication of whether European lenders need fresh capital.
If they do, new rules require governments to progressively ‘bail-in´ private creditors and uninsured larger depositors.
If that is not enough, then state aid is the next option while the EMS is also another possibility.