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Originally published Monday, May 13, 2013 at 12:40 AM

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German finance minister suggests 2-step bank union

Europe shouldn't rush to establish a central authority to wind up failing banks, but should rely at first on cooperation between national agencies, according to Germany's finance minister.

The Associated Press

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BERLIN —

Europe shouldn't rush to establish a central authority to wind up failing banks, but should rely at first on cooperation between national agencies, according to Germany's finance minister.

Setting out how to shut failed banks is one aspect of a banking union meant to stabilize the financial system among the 17 European Union countries that use the euro.

Officials from the European Central Bank have called for the establishment of a strong central authority backed by the financial firepower of a European fund to make decisions on unwinding banks. Berlin, however, has argued that setting up such an authority would require changing European Union treaties - a potentially cumbersome and time-consuming process.

Finance Minister Wolfgang Schaeuble wrote in Monday's Financial Times that Germany will assess "with an open mind" a proposal being prepared by the European Commission, the EU's executive arm, for the creation of a mechanism to deal with failing banks. He warned that existing EU treaties "do not suffice to anchor beyond doubt a new and strong central resolution authority."

"We should not make promises we cannot keep," Schaeuble wrote. He said initial predictions that a single European banking supervisor - the core of the banking union - could start work at the beginning of this year "cost the EU credibility." Germany was adamant that the supervisor shouldn't be rushed either; it is now expected to start work next year.

Schaeuble argued that when a bank is wound up, money and jobs are usually lost, prompting those affected to seek redress - meaning that a new European authority would need a solid legal base.

"Amending the treaties takes time," he wrote. "Luckily, the alternative is not between a legally shaky resolution authority now and the postponement of repair work on the banks."

Schaeuble said a mechanism based on a network of national authorities could start work once a European banking supervisor is operating. He said it would rely on national funds instead of a single European resolution fund, "which the industry would take many years to fill."

The result "would be a timber-framed, not a steel-framed, banking union," but that would buy time to create the legal basis for a more ambitious project with strong central authorities, Schaeuble said.

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