EU: Agreement on the rules governing the bank's own funds

by Francesco Guarascio

BRUSSELS (Reuters) – The Finance ministers of the european Union (EU) reached on Friday an agreement on the rules governing the bank’s own funds, decisive step towards greater financial stability of the bloc and the strengthening of the Fund single resolution (FRU).

This agreement comes after 18 months of negotiations heated up between the 28 member States on how to implement the new global rules on capital requirements for banks, revised after the financial crisis of 2007-2009.

“The Council (of Finance ministers of the EU) has reached an agreement on a general approach to the banking package,” said Vladislav Goranov, minister of Finance of Bulgaria, a country which currently holds the rotating presidency of the EU.

He spoke at a meeting of Finance ministers in Brussels.

This agreement opens the way for a new step towards the strengthening of the Fund single resolution (RUF), that the ministers of the EU are committed to build a safety net, although the final decision will be taken in June.

The RUF, an integral part of the single resolution Mechanism (MRU) set up within the euro area after the financial crises and sovereign debt from 2009 to 2012, is intended to be used for the resolution of bank failures, once other mechanisms of loss absorbency exhausted.

These two measures are considered to be related because the new rules on own funds of banks are expected to reduce the financial risks, which would then enable them to establish a greater sharing of risks between the countries of the euro area in the form of a strengthening of the Fund single resolution (FRU).

According to the terms of this agreement, which must still be approved by the members of the european parliament, the EU banks will have to meet a number of requirements aimed at controlling their loans and to ensure that they have stable sources of funding.

Germany and France have fully supported this agreement, while other countries members of the EU have joined with some reservations. Italy and Greece have failed. They argued that it should be accompanied by an agreement on the sharing of banking risks by June.

Although consistent with its previous statements, the positions of Italy can be explained, in part, because his government is in the phase of constitution.

RISK-SHARING

In the framework of this agreement, the Board of the single resolution (CRU), will have a clearer mandate for determining the amount of reserve capital required to guard against bankruptcy.

The ratio of minimum requirement of own funds and current liabilities” (MREL) will be set at 8% of total liabilities and own funds of large banks.

The THOUGHT however will be able to require reserves higher for banks that it deems to be insufficiently secure, or, conversely, less important for the institutions better capitalized.

The Finance ministers have agreed on a advantageous treatment for the big banks of the countries belonging to the Union bank, such as societe generale (PA:SOGN) of the large banks in the member countries of the banking union, in France, Deutsche Bank (DE:DBKGn) in Germany and Unicredit (MI:CRDI) in Italy.

The british Finance minister Philip Hammond and other ministers of smaller States of the EU were of the view that deviate from global standards could increase the risks.

The second measure to the risk-sharing banking is still far from being accepted although it is a pillar of the banking Union, the flagship project of the EU to strengthen its banking sector after the financial crisis.

(Francesco Guarascio, Catherine Mallebay-Vacqueur for French service, edited by Juliette Rouillon)