Europe Tempers Power of Agency to Shut Troubled Banks

Simon Dawson | Bloomberg | Getty Images

The European Commission will propose on Wednesday creating an agency to salvage or shut failed banks but its power to clean up the euro zone's financial sector will be tempered by resistance from Berlin.

Working in tandem with the European Central Bank as supervisor, the new authority will wind down or revamp banks in trouble. It completes the second pillar of a 'banking union' meant to galvanize the euro zone's response to the crisis.

If agreed by European Union states, the agency will have the means to impose losses on junior creditors of a stricken bank from 2015, officials familiar with the blueprint said.

But the new authority will be handicapped by the fact that it will have to wait years before it has a fund to pay for the costs of any bank wind-up it orders.

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The plan foresees tapping banks to build a war chest of up to 70 billion euros ($90 billion) but that is expected to take a decade, leaving the agency dependent on national schemes in the mean time, the officials said.

The EU's executive will not call for giving a backstop role to the euro zone's rescue fund, the European Stability Mechanism, undermining a central goal of banking union - namely to sever the 'doom loop' between bank and state.

Any suggestion of putting such a safety net in place faced stiff resistance from Germany, which feared that it could be left on the hook for problems uncovered in Spain's banks or elsewhere, when the ECB starts policing the sector next year.

Furthermore, the 'resolution board' that executes bank wind-downs will be forbidden from imposing decisions on countries, such as demanding the closure of a bank, if that would result in a bill for that nation's taxpayer.

Invisible Ink

The reform will be presented as the second leg of a banking union, a scheme designed to underpin confidence in the euro zone and end the previously chaotic handling of cross-border bank collapses such as Dexia.

The original commitment, made at the height of the currency bloc's crisis, was to prevent heavily indebted countries from having to contain problems at their banks alone, such as those that nearly bankrupted Ireland.

But last year's pledge by the European Central Bank to take whatever steps needed to back the single currency has calmed investor nerves, taking the pressure off countries to follow through.

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The ECB, alongside the International Monetary Fund, is growing impatient.

Speaking on Tuesday ahead of the announcement, Joerg Asmussen, a member of the six-member Executive Board that forms the nucleus of the ECB's policymaking, underscored the need for a "European backstop" for the resolution agency.

The scaling down of the plan is partly in response to Berlin's reluctance to surrender autonomy to a new agency. Germany has been particular sensitive as Chancellor Angela Merkel faces national elections in September.

Some EU official hope Berlin will soften its stance after the elections but Asmussen did not expect that, noting that countries such as the Netherlands, Finland, Slovakia and Estonia shared its doubts.

"It's easy to hide behind Germany ... It's a group of countries, it's not only Germany," he said.

EU Commission officials were so concerned about their proposals becoming public that they printed them using a type of 'invisible ink' technology to blank out the text if scanned.

"This system would be viewed as a good system by our German friends," said one official familiar with the proposal.

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Other countries who hoped for a more ambitious blueprint may, however, be disappointed.

As it is proposed, the new board would have authority over all 6,000 banks in the euro zone.

If a bank were to run into trouble, the ECB would inform this executive board, which could then vote on whether to close to salvage the bank.

The board would have representatives from the European Central Bank, the European Commission, the home country of the bank under review alongside those states where it has branches.

The Commission hopes that this group, which will vary according to the bank, will plan for any emergency, leaving little to decide at short notice should a lender face collapse.