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European banking union hurdle cleared

Wednesday, July 09 10:52:23

Germany's cabinet has approved a package of draft laws which effectively give the go-ahead to Europe's plans for banking union - its main confidence-building response to the crisis in the financial sector, a government source said today.

The European plans will mean there is one supervisor for euro zone banks, one set of rules to close or restructure troubled banks and one pot of money to pay for everything.

To minimise the expense to euro zone taxpayers, European Union policymakers have drawn up a law under which shareholders, creditors and very large depositors will lose money first in the event of a bank failure.

Under the German draft law, creditors and owners of failing German banks will face losses from as early as 2015, a year before European rules are envisaged for the whole bloc.

The European Central Bank will begin supervision of big banks across the 18 countries that use the euro later this year in a first step in banking union.

The next step will be a common approach to preventing banks in trouble from dragging down governments in euro zone states, as happened with Ireland. That is still a work in progress.

Another law in the package ensures Germany is in line with EU rules that allow the European Stability Mechanism (ESM) to recapitalise banks directly under certain strict circumstances.

Germany needs to pass the laws to implement Europe's banking union plans.

(Reuters)