Europe Prepares To Come Clean On Hidden Bank Losses

Updated Oct. 11, 2013 4:56 p.m. ET The euro zone and the International Monetary Fund were thrown into each other’s arms when Greece’s debt crisis began early in 2010. Now, officials say, they could be heading for a divorce. As representatives from both sides meet at the end of this week in Washington to discuss Greece’s need for extra cash and a lighter debt load, the clashes that have built up over the past three years are coming to a head. Antonio Borges in a 2011 photo. Bloomberg News “The divorce between Europe and the IMF is real,” Antonio Borges , a former European director at the IMF, said in an interview in June, just months before he died of cancer at the age of 63. “The fund is going back to its normal way of business. It is an institution used to being alone in calling the shots,” Mr. Borges said. Enlarge Image Mr.

Banks with higher-than-average capital attract deposits. * Earlier this year, the European Commission, the EU executive, sharpened the bloc’s state aid rules to share the costs of bank failures, stipulating that shareholders and junior bondholders will share the burden of saving a stricken bank. * In March, the bailout of Cyprus set a new precedent for saving banks, by also forcing losses on senior bondholders and depositors with more than 100,000 euros ($135,000). EU finance ministers agreed in June to adapt a similar but milder approach in EU law. The framework needs to be finalized with lawmakers in the European Parliament before coming into force. * In September, Europe took a significant step towards a single banking framework for the euro zone, known as banking union. EU lawmakers granted new powers to the European Central Bank to oversee the currency bloc’s 6,000 banks in 17 countries. Supervision by the ECB is expected to start towards the end of 2014. Banking union is conceived as a three-stage process involving a single bank supervisor, a single resolution authority and a single deposit-guarantee scheme. * Now comes the much harder step of establishing a single euro zone authority to wind up bad banks, which is resisted by Germany because as Europe’s largest economy it fears being forced to pay up for other countries’ banking losses. * In the meantime, the European Central Bank will launch a series of health checks on euro zone banks, as part of its supervisory role.

Factbox: Europe’s slow march to repair its banks

During the region’s debt turmoil, the European Union conducted two bank stress tests, considered flops for blunders such as giving a clean bill of health to Irish banks months before they pushed the country to the brink of bankruptcy. The ECB’s new checks are seen as the last chance to come clean for the euro zone as the bloc tries to set up a single banking framework, known as banking union. The debate opens amid ebbing political enthusiasm for banking union – originally planned as a three-stage process involving ECB bank supervision, alongside an agency to shut failing banks and a system of deposit guarantees. It would be the boldest step in European integration since the crisis. “We have to find a solution now,” said Michel Barnier, the EU Commissioner in charge of financial regulation, urging faster progress in the slow talks. “The next financial crisis is not going to wait for us.” ANGLO-GERMAN AXIS? In one sign of the divisions, Britain has repeatedly refused to sign off on the first pillar of the banking union framework, allowing the ECB monitor banks. Having earlier agreed, London now wants additional assurances from ministers this week that Britain, which is outside the euro and polices its own banks, will not face interference from the ECB-led euro bloc. Britain is likely to find a sympathetic ear in Berlin, which wants to keep London on side in its push to prevent stricter EU emissions rules to protect its luxury car makers. Before the ECB takes over as supervisor late next year, it will conduct health checks of the roughly 130 banks under its watch. This is the nub of the problem facing finance ministers at the two-day talks.

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