Europe is crafting new rules for winding down struggling banks that are meant to avoid any more expensive, taxpayer-funded bailouts as well as the financial panics triggered by surprise losses, such as those suffered by savers over the past year in Spain and Cyprus.
But with several countries demanding the right to shield entire classes of bank creditors from getting burned during a failure, the new rules may keep the European Union close to its status quo: The haves bail out, while the have-nots bail in.
In other words, governments in the richer countries will be able to prop up weak banks if they threaten to drag down the economy, while poorer ones will have to share the cost of crises with bank investors and creditors.
At a meeting in Luxembourg on Friday, EU finance ministers are expected to reach an agreement on the new rules. They will force banks to draw up detailed plans on how they would downsize or close during a crisis, require governments to set up national resolution authorities and funds to implement bank restructurings, and spell out the order in which investors and creditors have to absorb losses.
Had these rules been fully in place in 2008, all the bank failures since then in the EU, except perhaps Ireland’s Anglo Irish, could have been resolved without taxpayer money, according to the European Commission, the EU’s executive arm.
After much back and forth, ministers are set to give an extra layer of protection even to large deposits held by individuals and small and midsize companies when allocating losses, arguing they have a harder time assessing a bank’s riskiness. That comes at the expense of big corporations, whose deposits above €100,000 ($134,000) will be converted into shares at the same time as other senior, unsecured creditors.
But to the dismay of the commission, which is seeking a uniform regime across the bloc, several governments also want to be able to exercise discretion over which liabilities would be excluded from losses when a bank fails. According to officials involved in the negotiations, they are likely to win.
France—and it is far from alone—wants to be able to use its national resolution fund, and, until that starts functioning, public money, to step in and rescue a bank before any large depositors take a hit.
Taking the Hit
During a bank’s failure, its investors and creditors would take losses in this order, unless a country decides to exclude them:
- 1. Shareholders
- 2. Junior creditors
- 3. Senior creditors, large corporate deposits above €100,000
- 4. Deposits above €100,000 owned by individuals, small and medium-size companies
- 5. National deposit-guarantee funds
Source: WSJ reporting/EU documents
That would allow governments to avoid another Cyprus scenario, where politicians are struggling to explain to voters why they didn’t shield life-long savers, charities and local companies from steep losses imposed on deposits above €100,000 in the country’s two biggest banks.
The Spanish government, under a recent bank bailout deal with the euro zone, was also unable to protect ordinary bank customers who had been talked into converting their savings into junior bank debt that quickly went bad.
Other creditors that should in the French view be close to the emergency exit are owners of derivatives sold by the failing bank, as well as banks that provided short-term loans to it—the very liabilities that sparked global panic after the collapse of U.S. investment bank Lehman Brothers in 2008.
The exclusion of interbank loans is also advocated by the European Central Bank, which is growing tired of being the sole liquidity provider for Southern European banks that have lost the trust of their peers.
That dynamic has changed somewhat since euro countries began talking about mutualizing some banking risks by allowing their common rescue fund to directly recapitalize banks. Rich states like Finland and the Netherlands, keenly aware that they might have to make up the difference, want to keep exceptions to a bare minimum.
Countries outside the euro zone like the U.K. also want national flexibility, fearing that the obsession of some euro-zone governments with keeping recapitalization costs low—so they don’t have to foot the bill for other countries’ financial missteps—will lead to overly aggressive bail-ins at their own banks.
“The application of these [bail-in] tools can be different in different countries, say in euro-zone countries and non-euro-zone countries,” the Lithuanian Finance Minister Rimantas Sadzius, who will be leading negotiations on the new rules with the European Parliament, said in an interview Wednesday.
Even advocates of more flexibility, including France, say they are ready to place some checks on the exclusions, for instance by capping how much they can cost or by having them approved by some centralized authority.
Another point where things may look different for euro ins and outs and haves and have-nots is the timing of the new rules.The official kick-in date for the EU rules is likely to remain 2018, according to officials. But euro-zone finance ministers will also be having a separate discussion over the scope of the bail-in required before their common rescue fund can step in—something that officials now say could become possible in the fall of 2014.
The official kick-in date for the EU rules is likely to remain 2018, according to officials. But euro-zone finance ministers will also be having a separate discussion over the scope of the bail-in required before their common rescue fund can step in—something that officials now say could become possible in the fall of 2014.
—Tom Fairless contributed to this article.Write to Gabriele Steinhauser at firstname.lastname@example.org
This originally appeared here.