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Eurozone finance ministers late Thursday agreed on the main features of a mechanism to allow the European Stability Mechanism (ESM) to directly inject capital into failed banks.
Building block of banking union
"After several months of intensive preparations and discussions, today we reached political agreement on the main features of the ESM direct recapitalization instrument (DRI)," Eurogroup chief Jeroen Dijsselbloem told reporters.
Dijsselbloem hailed the DRI as "one of the most important building blocks of the banking union."
European Union (EU) commissioner for economic and monetary affairs Olli Rehn said, with the new agreement, "we are closer to banking union."
Currently, the eurozone's permanent bailout fund cannot directly inject capital to failed banks in the single currency area and only the member state to which the banks belong to have to implement the injection.
"This instrument will help preserve the stability of the euro area, and remove the risk of contagion from the financial sector to the sovereigns, thus weakening the vicious circle between sovereigns," the Eurogroup head said at a press conference after a meeting of eurozone finance ministers.
Clear eligibility, criteria
The establishment of the DRI mechanism doesn't mean that eurozone member states are automatically equipped with the banking bailout program.
Dijsselbloem said that, "there will be clear eligibility and criteria for using this instrument."
First, the use of the DRI can only be allowed when the requesting ESM member country is unable to provide financial assistance to the institutions in full without very adverse effects on its own fiscal sustainability.
Secondly, the request for using the DRI can only be met when providing financial assistance to the requesting ESM member state is indispensable to safeguard the financial stability of the euro area as a whole.
Then, only institutions that have a systemic relevance or poses a serious threat to the financial stability of the euro area as a whole or the requesting ESM member.
To ensure efficient use of ESM resources, the ESM will assist to directly recapitalize only those institutions whose viability can be secured through a capital injection and restructing plan.
To preserve the ESM's lending capacity for other instruments, the ESM sets a cap of 60 billion euros for the amount of financial assistance available for DRI, but this limit can be reviewed by the board if deemed necessary, Dijsselbloem said.
