The Strategist

Eurozone to ramp up support for problem banks

12/01/2020 - 04:57

The Eurozone has agreed to strengthen the mechanism for resolving the situation in troubled banks, as evidenced by the decision of the Council of Ministers of Finance of the Eurozone (Eurogroup).

"The Eurogroup agreed to reform the European Stability Mechanism (ESM), to sign a revised agreement (on its work) in January 2021 and to launch the process of its ratification," - reads a statement after the Eurogroup’s meeting, which was held on Monday in an extended format with the participation of representatives of the EU.

Such a solution, in particular, will allow the ESM to assist, if necessary, with a special mechanism for resolving problem banks (Single resolution fund, SRF).

Klaus Regling, head of the European Stability Mechanism, told that the process of ratification of the new agreement may take about a year.

"The renewed ESM contract will enable it to become a pillar for the SRF. This means that if the SRF's resources are exhausted, the ESM will be able to provide the SRF with a loan to finance the (problem) banks," he explained.

Eurogroup head Paschal Donohoe said that Eurogroup has agreed to put this SRF support mechanism into operation two years earlier - in early 2022.

The SRF is an element of the banking union being formed in the Eurozone and the European Union. It has been filled with contributions from credit organisations and certain investment firms from its member states for several years now. Previously, it was expected that its volume would reach at least 1% of all covered deposits of all credit institutions in the banking union, and the volume was expected to be around €60 billion. In 2019, the volume of the fund was approximately €33 billion.

This fund should be used as a last resort. It will be able, for example, to guarantee the assets or liabilities of a supported bank, provide loans to it or acquire its assets.