Failed Banks’ Bondholders May Share Future Gains Under EU Plans

Bank bondholders that are forced to take losses under European Union plans to prevent the need for taxpayer bailouts may get the chance to recoup some of their investment in failed lenders, an EU official said.

Options include giving investors shares in a temporary institution set up to hold the failed bank assets, the official said. Bondholders may also receive compensation or a claim on future profits if a crisis-hit lender improves its financial position, the official said in Brussels today.

The measures are part of broader plans to bolster the ability of regulators and governments to handle bank failures, the official said. The proposals may also include so-called early-intervention powers for authorities that would enable them to replace a struggling lender’s management, they said.

Lenders including Citigroup Inc. and Goldman Sachs Group Inc. have said that imposing losses on banks’ senior bondholders may make it more expensive to attract funding. The move is likely to have a “negative impact both on pricing and market depth for bank debt” Citigroup said in a note to the commission earlier this year. Debt writedowns “will have implications for the funding markets,” Goldman said in its written response to the commission’s plans.

Under the EU’s proposal, money raised by writing down or converting bondholders’ stakes would be used to cover the costs of either restructuring or winding down the crisis-hit lender, the official said. Measures being considered include a so-called clawback rule that would give investors a claim on a share of the lender’s future revenues if its financial situation improved, the EU official said.

Credit Ratings

Separately, the EU is planning to increase competition in the market for credit ratings and to simplify company reporting, the official said.

Plans may include forcing companies to periodically change the firm they use to acquire credit ratings. On the accounting issue, the EU may eliminate the requirement businesses produce detailed quarterly reports, the official said.

Reducing this reporting may cut short-term market volatility, they said, as well as lessen administrative burdens on small businesses.

To contact the reporters on this story:

Jim Brunsden in Brussels at jbrunsden@bloomberg.net.

To contact the reporter on this story: Rebecca Christie in Brussels at rchristie4@bloomberg.net