Euro zone lenders count cost of EU bank impasse

ROME/LONDON, June 24 Mon Jun 24, 2013 6:13pm BST

Eurogroup chairman Jeroen Dijsselbloem talks to Ireland's Finance Minister Michael Noonan (R) during a euro zone finance ministers meeting in Luxembourg June 20, 2013. REUTERS/Francois Lenoir

Eurogroup chairman Jeroen Dijsselbloem talks to Ireland's Finance Minister Michael Noonan (R) during a euro zone finance ministers meeting in Luxembourg June 20, 2013.

Credit: Reuters/Francois Lenoir

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ROME/LONDON, June 24 (Reuters/IFR) - Divisions over forging a European banking union are compounding the problems facing the bloc's banks, fuelling uncertainty just as a global market slump raises their funding costs.

European finance ministers will attempt on Wednesday to agree common rules on who pays when a bank collapses, after failing to come up with a deal last week.

The impasse has led investors to demand a higher premium to fund weaker European lenders and made banks reluctant to lend to one another, making them ever more reliant on the European Central Bank (ECB).

"We are worried about how negotiations are going because we have always said the banking union is a priority if we want the European financial market to resume working properly," Giovanni Sabatini, director-general of Italy's banking association, said.

"The quality of Italian banks' assets is being questioned on the basis of non-harmonised standards. This has heavy costs for us which is why we think that all the elements of the single supervisory system are a goal that must be achieved as quickly as possible," Sabatini told Reuters on Monday.

Failure to agree a "bail in" deal, combined with market concerns over the U.S. Federal Reserve's plans to pare stimulus measures, drove bank shares lower and funding costs higher.

"Clearly you can't have banking union if you can't agree on the very basics of bank bailout methodologies," said Chris Wheeler, an analyst at Mediobanca in London.

"If you look at who is underperforming today it is the peripheral banks who are at the bottom of the pile."

Greek banks led the fall with National Bank of Greece (NBGr.AT) and Alpha Bank (ACBr.AT) down 11 and six percent respectively. Italy's Banco Popolare (BAPO.MI) was down nearly one percent while Spain's Caixabank (CABK.MC) fell 2.75 percent.

The iTraxx Senior Financials Index, which measures the cost of insuring bank debt against the risk of default, is trading at 189 basis points, more than 50 percent above the low of 125 basis points hit on May 22. The index is around six percent off the high of 200 basis points reached after the Cypriot bailout.

This was the first time euro zone depositors were forced to take losses, making euro zone banks a riskier investment.

UNCERTAINTY THE ENEMY

EU leaders agreed a year ago to a banking union to ensure failing banks do not bankrupt governments and to avoid a repeat of the 2007-09 crisis, which saw them bailed out by taxpayers.

The disagreement last week, chiefly between France and Germany, largely centred on how much discretion to give national authorities when imposing losses on bondholders or large savers.

There is broad consensus among EU finance ministers that losses would first be imposed on shareholders and bondholders when a bank fails, followed by depositors with more than 100,000 euros. Smaller depositors will be protected.

While there is no immediate deadline for an agreement, a deal is a step required by Germany before it will sign off on a scheme for the 17-nation euro zone's bank bailout fund.

Lack of agreement on who pays could also delay plans for a common resolution authority for the euro zone, due to be presented by the European Commission next month.

Douglas Flint, chairman of both British bank HSBC (HSBA.L) and the Institute of International Finance, told Reuters in Paris that he was not surprised it was taking time to agree on a structure for a resolution mechanism and said it may take until well into next year at best to agree details.

"You can agree what the mechanisms might be and what the hierarchy of claims and the amount of bail-inable capital there ought to be, but to talk about a resolution authority and how you implement it and who pays for it, you'd want to know (what the risks are)," Flint said.

Markets are already factoring in that senior bondholders, once considered sacrosanct, will bear part of the cost of future bailouts, once shareholders and junior bondholders are hit.

And banks in the euro zone periphery are having to pay more to attract investors. Bank of Ireland's (BKIR.I) 500 million euro three-year bond has widened by more than 100 basis points, Caixa Bank's 1 billion euro five-year bond by more than 50 bps and Banco Espirito Santo's (BES.LS) 500 million euros five-year has widened by more than 90 bps since May.

"With senior debt, we think it's more a case of when rather (than) if they introduce bail-in," said Robert Montague, a senior financials analyst at ECM.

(Additional reporting by Clare Hutchison in London, Steve Slater and Laura Noonan in Paris and Carmel Crimmins in Dublin. Writing by Carmel Crimmins; editing by Alexander Smith)

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