European finance ministers meeting in Brussels are expected to pledge support for any banks that run into difficulty as a result of major stress tests which will be carried out next year.
Under the EU’s proposed banking union, the European Central Bank will carry out the tests before it assumes the role of Europe-wide banking supervisor.
However, there is still disagreement over how far Europe’s bailout fund, the ESM, should be used to directly support banks that are in trouble, with Germany continuing to resist such a use of ESM funds.
A new banking union is the most ambitious reform the EU has embarked upon since the creation of the euro.
The idea is that banks across Europe should be forced to come clean on their balance sheets, before facing long term scrutiny by the ECB.
This is to avoid the kind of banking crises – such as those experienced in Ireland and Spain – which have contributed to the eurozone debt calamity.
130 banks will face an asset quality review to look at the state of their assets, a balance sheet review to look at liabilities, and stress tests to check for their resilience to future shocks.
This process may reveal gaping holes, and it is how to plug those holes which is at issue.
Shareholders and creditors will have to step in first, followed by national governments – only then might the ESM get involved, but Germany is still resisting this idea.
Berlin is concerned that German taxpayers will be on the hook for bank losses elsewhere.
It is a sensitive issue for the Government which is still hoping for ESM funds to be injected into pillar Irish banks.