Germany secured a partial victory in its bid to shield itssmaller banks from paying fees to the euro area's new crisis fund,as the European Commission set a cap on the contributions.

In the system laid out today by the commission, the EuropeanUnion's (EU's) executive arm, larger banks will pay the lion'sshare of levies to fill the planned 55 billion-euro (US$70 billion)common resolution fund based on their size and risk-taking. Smallerbanks will pay according to a scale of flat fees.

“These new rules pave the way for an operational SingleResolution Fund,” Michel Barnier, the EU's financial-serviceschief, said by email. “The approach chosen is fair, as each bankwill contribute in proportion to its size and risk profile. It isalso proportionate, as the smallest banks have their own adjustedregime of contributions.”

Germany and European Parliament lawmakers have been at theforefront of calls for measures to shield smaller banks, arguingthat they are unlikely ever to tap the fund, which is intended tocover the costs of saving or shuttering lenders.

German Finance Minister Wolfgang Schaeuble pushed for banks thatpresent a minimal risk to financial stability to pay “no or verylittle levies” into the fund. “The proportionality of thecontribution must be ensured,” he said in June.

The Brussels-based commission has sought to find middle groundbetween their position and that of other nations, such as Franceand the Netherlands, which have argued that the burden should beshared and that all banks benefit from financial stability.

The debate has pitted countries with more consolidated bankingsystems against those with more diffused systems that feature lotsof smaller lenders.

The resolution fund, which will be built up over eight yearsstarting in 2016, is part of a new, centralized system being put inplace to handle bank failures. The euro zone's Single ResolutionMechanism also has a board that will be established next year. Thelegislation underpinning the structure was approved earlier thisyear and states that all banks in the currency bloc must contributeto the fund.

Banks will begin paying levies next year, initially as part ofnational schemes, which will be absorbed into the common fund.

The plan is part of a push by the EU to make sure that “bankspay for themselves if they have problems, and not the taxpayers,”Barnier said.

Total Assets

Under the commission's plan, banks whose total liabilities,minus capital and government-guaranteed deposits, are 50 millioneuros or less, and who have total assets of less than 1 billioneuros, would pay a 1,000-euro annual lump sum to the fund.The levywould increase in increments to 50,000 euros for banks withliabilities of 300 million euros or less, and assets of less than 1billion euros, the largest category of institutions that pay flatfees.

Nations would have the option of raising the 1 billion-euroasset threshold to 3 billion euros during the transitional yearswhile the fund is being built up.

The flat-fee system will reduce the amount small banks pay by anaverage of 70 percent compared with what they would have paid underthe approach used for other lenders, according to commissiondata.

The plans also include some special treatment of banks that aremembers of so-called institutional-protection schemes, a type ofmutual guarantee system between financial institutions. Banks insuch a system would be allowed to deduct business they do betweenthemselves when calculating their size. These arrangements are usedby community lending banks, known as savings banks, in countriessuch as Germany and Austria.

The Single Resolution Fund could be tapped to stabilize astricken bank should other steps, such as wiping out someshareholders and other creditors, prove insufficient. This wouldbuy time for measures such as asset transfers and restructuringaimed at winding down the bank, or finding a way to resurrectit.

The fund will have standing reserves equivalent to 1 percent ofgovernment-guaranteed bank deposits in the euro area.

National Funds

The EU Commission plans include a limit possibility, while thefund is being built up, for banks to fulfill some of theirobligations through payment commitments rather than cash. Thispossibility would apply in cases where banks are paying more intothe euro-area fund than they would have had to pay into a similarnational fund.

The commission's approach means that the largest euro-areabanks, representing 85 percent of total assets, would pay around 90percent of total contributions, while the smallest banksrepresenting 1 percent of total assets would pay about 0.3 percent,according to EU data.

The commission also published parallel rules for nations outsidethe euro area that don't sign their banks up to the common system.These nations will be required to impose levies on their banks aspart of national programs.

In the case of the Single Resolution Fund rules, thecommission's plans are in draft form, meaning that to have legaleffect the EU must still publish a final version after Nov. 1.

For the national rules, governments and the EU parliament have asix-month window to raise objections before the measures becomelaw.

Commission officials have held a series of meetings withlawmakers and governments in a bid to remove potential obstaclesahead of today's publication.

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