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By Bloomberg

Regulators could weaken plans to safeguard the financial system from failing banks if they put up too many national barriers, said Elke Koenig, head of the euro area’s new resolution authority.

In Europe and around the world, regulators are working to coordinate rules and plan for how to handle cross-border bank failures. Koenig’s fledgling agency will start taking an active role in bank failures in 2016, and is using this year to get procedures in place.

One goal will be to set policies that don’t promote ringfencing, the practice of walling off bank assets along national lines. Regulators need to work actively to discourage this practice, which Koenig said would be “to the detriment of everyone” if it were part of the oversight strategy.

“Ringfencing is something that might destroy any well- intended, well-crafted resolution,” Koenig said in an interview in Washington. “We all have promised to each other that we won’t ringfence and I hope that the resolution planning we do will lead to us really being capable to say there is no ringfencing.”

Koenig’s Single Resolution Mechanism is the second piece of the European Union’s banking union project, following the European Central Bank’s assumption last November of oversight powers for banks in the euro area. After rescuing five euro countries during the debt crisis, the bloc has sought to tighten financial oversight and prevent another round of contagious crises that spread from sovereign nations to banks and back.

ECB Liquidity

Greece remains caught in the cross hairs of this dilemma. As Prime Minister Alexis Tsipras’s government struggles to reach a deal with creditors, his nation is running out of cash and depending on emergency liquidity assistance that the ECB provides to Greek banks.

Central banks in southeastern European countries, in cooperation with the ECB’s bank supervision arm, have told banking subsidiaries of Greek lenders in their countries to exit all exposure to Greek state bonds and treasury bills, according to an April 17 report in Kathimerini newspaper.

Greek authorities also intervened last week when a small bank looked unable to survive. Panellinia Bank failed to raise necessary funds identified in the context of a recapitalization exercise, the Bank of Greece said in an e-mailed statement.

Koenig said national authorities “resolved a small Greek bank with no major, I would say, concern to financial stability” and it appears “they did a good job.” She said the bank had been in weak condition and was unable to recover from its recent struggles amid Greece’s economic difficulties.

‘Same Song Book’

Greek authorities will remain the lead agency if something were to happen to a big Greek bank in 2015, Koenig said. Her agency will become involved should any difficulties arrive after Jan. 1.

At last week’s International Monetary Fund meetings in Washington, Koenig said she compared notes with her counterparts as part of ongoing efforts to make sure they are all “singing from the same song book.” She said regulators have identified the main challenges to cross-border bank failures and are working to reduce the likelihood that different rules could interfere with regulatory actions.

“When you compare obstacles to resolution addressed by our U.S. colleagues, obstacles to resolution addressed to the Bank of England or us, you would find a fairly homogeneous list,” Koenig said. “We need to work off that list.”