The three AAA rated euro-area states last week called for regulators across the EU to gain so-called bail-in powers as soon as 2015, rather than in 2018 as currently proposed, said the officials, who declined to be identified because the talks are private. The European Central Bank has warned that 2018 is “far too far away” for the new rules, which seek to insulate taxpayers and the euro area’s firewall fund from rescue costs.
The bail-in push from the Germans, Dutch and Finns was made during Jan. 29-30 technical meetings in Brussels, the same week that the Dutch government shielded senior bondholders of nationalized lender SNS Reaal NV. (SR) Dutch Finance Minister Jeroen Dijsselbloem said that step was needed to prevent a spike in funding costs for SNS Reaal and other lenders in the country.
Accelerating the loss-sharing rules would give the euro zone more tools to avoid taxpayer rescues like those provided to Greece, Ireland, Portugal and Spain and sought by Cyprus. It also could ease concerns about financial liability within the euro zone once the ECB takes over financial supervision within the 17-nation currency bloc.
“The fear that the banking union turns into a transfer union politically is going to trump any political protection that national banks might have had,” Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington, said by telephone. “No one likes to bail out a bank, but everyone certainly hates bailing out a bank in another country.”
Kirkegaard said the rule changes, once implemented, will affect the capital available to banks and make it more expensive for them to issue debt, reducing their ability to lend. As a result, non-financial companies may step up corporate bond issuance as an alternative to bank loans.
Senior bank bondholders so far have mostly avoided losses, while European governments and the International Monetary Fund have committed to 486 billion euros of aid since 2010.
Under the EU plans, drawn up by the European Commission, regulators would be given the power to impose losses on holders of senior unsecured debt, as well as derivatives counterparties, once a lender’s capital and subordinated debt are wiped out. Regulators could also force debt to convert into common shares, so shoring up a struggling bank’s equity.
“The rationale for us to propose 2018 for the bail-in clause was to give time to the markets to anticipate the new regime,” said Stefaan De Rynck, a spokesman for EU Financial Services Commissioner Michel Barnier. “We are open to examine the consequences of anticipating the bail-in clause, if that would be the option that the council would want to choose.”
Once the new rules take effect, national authorities would be expected to exhaust bail-in options before resorting to public money to stabilize the bank.
The nations are seeking a date as soon as 2015 because it would provide time to adjust to the measures while not putting individual countries at a competitive disadvantage if they apply bail-in rules ahead of 2018, one of the officials said.
Senior bank-creditor writedowns in the EU have been rare during the financial crisis, with Ireland refusing to take the step even as it was forced in 2010 to seek an international bailout.
Euro-zone finance ministers agreed in December to hand bank supervisory powers to the ECB, opening up the possibility that the bloc’s firewall fund, the European Stability Mechanism, could directly recapitalize lenders. Governments clashed last month over the conditions for tapping this support.
“We need to get rid of the idea that as soon as there’s a bank in trouble, the state will help,” Dijsselbloem, who this year took the helm of the group of euro-area finance ministers, said on Feb. 3 on the Dutch television program Buitenhof. “It must become possible to pull companies apart and it must become possible to make shareholders, bondholders more responsible for a company in trouble.”
Denmark in 2011 became the first EU nation to enforce bail- in legislation, leading to senior creditor losses after the country’s regulator declared Amagerbanken A/S and Fjordbank Mors A/S insolvent. Investors reacted to the move by temporarily shutting most of the nation’s 120 banks out of funding markets.
Spokespeople for the Dutch and Finnish representations to the EU declined to comment. The German Finance Ministry referred to comments made last year by Finance Minister Wolfgang Schaeuble, in which he advocated a 2015 start date for the bail- in powers.