EU finance ministers fail to agree on rules for bank failures despite marathon negotiations

LUXEMBOURG — European Union finance ministers negotiating almost around the clock broke up unsuccessful talks on Saturday on how to downsize or close banks without letting taxpayers foot the bill and faced a danger that the divisive issue could undermine trust in Europe's ability to stabilize its financial system.

Irish Finance Minister Michael Noonan said that the negotiations he chairs would need another "full meeting" next Wednesday to bridge fundamental differences between the 27 member nations and warned "there is no guarantee it will reach conclusion."

Despite 19 hours of intricate negotiations, several ministers hinted at the prolonged impasse between the members of the 17-nation eurozone and the EU's ten other members like Britain that are not part of the currency union.

"It is principally an issue of the non-euro and the euro" nations, Noonan said.

French Finance Minister Pierre Moscovici voiced confidence that ministers will be able to broker a deal at the emergency meeting which comes only hours ahead of a summit of EU leaders to assess the brittle financial state of the union.

"I have no doubt we will reach a deal," Moscovici said.

An agreement on the rules would have been an important step to stabilizing Europe's financial system and establish a so-called banking union, which aims to give the supervision and rescue of banks to European institutions rather than leaving weaker member states to fend for themselves. It is a key part of the EU plans to restore financial and economic stability to the region.

The ministers at their meeting in Luxembourg sought to decide on new rules determining the order in which investors and creditors would have to pay for bank restructurings. A key stumbling block was who to hit hardest: Should losses be limited to banks' shareholders and creditors, or should small companies and ordinary savers holding uninsured deposits worth more than 100,000 euros ($132,000) also be included?

The most controversial issue, however, proved to be how much leeway member states should be granted in making decisions on winding down banks. Some countries like Britain don't want to be bound by rigid European rules. Other nations warned that too much flexibility would create new imbalances between the bloc's weaker and stronger economies and destroy the project of establishing a single set of rules that creates certainty for investors and restores trust in the financial system.

Moscovici said "90 percent of the work" was done, although France and others were still pushing for greater flexibility.

The ministers had vowed to resolve the issue by the end of June, thus the agreement on Wednesday's emergency meeting. Noonan however said the issue could spill beyond that, when Lithuania will take over the chairmanship of EU meetings.

Once the ministers finalize the legislation, they will then start negotiating the legislation with the European Parliament.

In addition to how much capital a bank must hold, the new European rules would also establish a minimum level of funds — be it capital, bonds, or deposits — that banks must have on their books to ensure that there's always enough privately held assets on which losses can be forced, thus shielding taxpayers from the burden of propping up the bank.

Following the 2008-2009 financial crisis, countries like Ireland, Britain and Germany each had to pump dozens of billions of fresh capital into ailing banks to avoid the financial system from collapsing.

Europe has already had to deal with problems involved in restructuring banks this year. Cyprus had to seek a rescue loan after it could no longer shoulder the cost of bailing out its banks.

An initial agreement with the island's European creditors and the International Monetary Fund sparked market fears since it exposed small savers with deposits under the 100,000 euro guarantee to losses.

The deal was rapidly overhauled, but holders of large deposits in some banks were forced to take harsh losses.

In the U.S., the Federal Deposit Insurance Corp.'s rules specify that deposits larger than $250,000 might have to take losses in case of bank failures, but Europe still lacks a common rule.

The new rules being discussed Friday will also foresee the establishment of national bank restructuring funds, which will eventually be merged into a European resolution authority, one of three planned parts of Europe's banking union.

Another part will be centralized oversight of big banks anchored at the European Central Bank due to be operational next year. But the discussion on the third section, a jointly guaranteed deposit insurance, is only in its early stages.

"The banking union is built brick by brick," Moscovici said Friday.

At their meeting, the finance ministers also rubber-stamped a seven-year extension of maturities on the bailout loans for Portugal and Ireland, granting the countries more financial leeway.

On Thursday, the finance ministers of the 17 EU countries that use the euro agreed on broad guidelines on how to use the bloc's permanent bailout fund to inject fresh capital into ailing banks as a means of last resort to keep banks from failing.

Enabling the 500 billion euro ($670 billion) rescue fund to shore up struggling banks directly is another long-promised building brick of the banking union.