Banks' US$3.2b payments put Euro-Area crisis fund on track

[FRANKFURT] The biggest euro-area banks will put 2.8 billion euros (US$3.2 billion) this year into crisis funds intended to keep taxpayers off the hook for meltdowns in the financial industry.

Fourteen German banks are contributing 1.4 billion euros, while five in France will pay 856 million euros and six in Italy 351.3 million euros, their filings show. German banks are paying more than twice as much as their French competitors when considering the levies as a share of assets.

Banks and their investors are being put on the hook for losses after European governments rescued the industry following the financial crisis, with 1.6 trillion euros, equivalent to 13 percent of the bloc's annual gross domestic product, committed from 2008 to 2011.

"This is still the building-up phase, so the funds would probably not be enough should a bank run into trouble just yet," said Stefan Bongardt, an analyst at Independent Research GmbH in Frankfurt. "Even at full capacity, the fund on its own wouldn't be able to handle the kind of crisis we saw in 2008, but a lot has happened since then in terms of making the European banking industry safer." European Union law requires the bloc's 28 countries to have resolution funds as a buffer to prevent public bailouts. The funds have a financing target equivalent to at least 1 per cent of the amount of covered deposits of all lenders on their territory. In the euro area, these national pots will start to merge on Jan. 1 into a Single Resolution Fund with a target of about 55 billion euros, which will be built up over eight years. The fund will initially consist of national compartments that will gradually be merged, starting with 40 percent next year.

The euro area's Single Resolution Mechanism wants to raise 10 per cent of its target volume this year and 11.25 per cent annually through 2023, according to documents on the website of FMSA, Germany's fund for winding down failed banks.

The size of the contributions that 33 of the largest euro- area banks say they are making suggest the SRM is on track. The 2.8 billion euros those banks have set aside via national funds this year is equal to 5.1 per cent of the SRM's target volume. The firms have a combined balance sheet of 14.6 trillion euros, or 47 per cent of euro-area bank assets including interbank loans.

Payments must be made to national authorities by the end of December and will be transferred to the single fund early next year. A Single Resolution Board official declined to say what volume the fund will have next year.

Before recourse could be made to the Single Resolution Fund, other options including a bail-in tool for imposing losses on a bank's private investors would have to be exhausted.

"The SRF will only be used as last resort once shareholders and creditors have fully contributed to the resolution measures," said Single Resolution Board Chair Elke Koenig.

The formula for the levies takes account of a bank's liabilities, minus its equity and covered deposits, and is adjusted for risk.

German banks are paying more than lenders in other countries because they held 3.26 billion euros of deposits for non-banks in the euro area at the end of July, more than any other country in the currency bloc, including the 2.11 billion euros held by French banks.

"Banks are getting back to growth, which takes the sting out of the cost of the levies," said Bongardt, who has a neutral stance on European bank shares.

BLOOMBERG