European finance ministers have agreed on a plan to rescue failing banks. It is not a good one. Policy makers at key institutions like the European Parliament and the European Central Bank should push for a better deal.
The agreement, which the parliament must still approve, would create a poorly funded bureaucratic system that would do little to restore confidence among investors and depositors in the 17 countries that use the euro. The centerpiece would be a 55 billion euro ($75.2 billion) fund to help recapitalize troubled banks. The fund would be underwritten by fees on all banks over 10 years starting in 2015. But a fund of this size could be overwhelmed by even a modest crisis. Ireland, for example, was forced to pump 30 billion euros into just one financial institution, Anglo Irish Bank, during the recent financial crisis.
European leaders have given too little thought to what will happen when its resolution fund is exhausted. During the first 10 years, individual governments will be able to draw on a portion of the fund based on the contributions of their banks. But a government will have to fend for itself if it needs more money to deal with a major crisis — dipping into tax revenues, for instance, or borrowing from another country or from the European Union's central rescue fund, which has been used to give loans to countries like Greece.
German leaders pushed for these conditions because they do not want their taxpayers to foot the bill for saving banks in other countries. The finance ministers have promised a "backstop" for the fund by 2026, but they provided few details.
Perversely, the agreement almost seems designed to prevent a timely response to a banking crisis. Several committees made up of European and national government officials must approve a rescue operation before regulators can move in. Indeed, by one count, more than 100 people could be required to sign off on a decision to recapitalize large banks that require infusions of several billion euros. This kind of bureaucratic layering and prolonged decision making can only add to a financial panic.
One of the main reasons the euro crisis has lasted so long and been so devastating is that economically weaker European countries like Greece, Ireland and Spain have been unable or unwilling to regulate their banks and have struggled to recapitalize or shut down troubled institutions. European officials promised to create a strong and efficient banking union to address those problems. The system they have come with is, instead, weak and unwieldy. European legislators must push for something far better.
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