European Union finance ministers tackled bank sector reform on Friday, aiming to build on a eurozone deal to inject capital directly into failing lenders to prevent wider damage to the economy.
On Thursday, the 17 eurozone finance ministers agreed how the single currency's rescue fund, the European Stability Mechanism, could help the banks without adding to the already large debt burden on member states.
German Finance Minister Wolfgang Schaeuble said that the accord marked an "important step ... towards banking union," the new regulatory framework for EU banks aimed at containing the fallout from any bank collapse.
Warning that the talks on Friday could prove difficult, Irish Finance Minister Michael Noonan said the deal cleared the way for discussion of the last major issues on the way to banking union.
"We have made significant progress in narrowing the ground (but) there are still some significant divergences of opinion," Noonan said, highlighting the treatment of bank creditors.
Up to now, the taxpayer has paid for most of state and bank bailouts but this has stoked growing unease and only added to overall debt levels.
Part of a bailout for Greece involved losses for bondholders, and this caused a crisis for banks in Cyprus.
To address problem of taxpayers' being landed with most of the costs, the EU, the European Central Bank and the International Monetary Fund in March agreed a Cyprus rescue which 'bailed-in' larger depositors in its two biggest banks to pay for their restructuring.
That move shocked savers who had felt they were safe, particularly in light of the EU's supposedly blanket guarantee of deposits up to 100,000 euros.
Noonan said the biggest issue at Friday's talks would be how the bail-in option would be managed, with some states wanting more flexibility to deal with it at a national, as opposed to an EU level.
The concern is if a company is bailed-in during a bank rescue, it could be weakened as a result and have an adverse knock-on effect on the wider economy.
Over-extended banks have been at the heart of the debt crisis and fixing the problem through what is known as the Banking Recovery and Resolution Direction being discussed Friday is seen as crucial.
The EU initially set up the 500-billion-euro ($665-billion) ESM to bail out member states but last June, when Spain's banks looked near to collapse, Brussels extended its scope to allow direct aid for struggling lenders.
Under Thursday's accord, the ESM will be allowed to inject up to 60 billion euros into lenders needing help but the figure can be reviewed later if needed.
The member state involved will also have to ensure that the bank seeking aid has a minimum 4.5 percent capital buffer and make up the difference if not, and then must make another contribution in due course.
The Punch