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EU Advised by IMF Staff Paper to Harmonize Depositor Preference

The European Union should give depositors preference over other unsecured creditors when a bank fails and standardize its approach across the 27-nation bloc, according to International Monetary Fund’s staff memorandum.

The EU should introduce a preference for insured depositors immediately to buttress investors’ confidence, the May 9 analysis seen by Bloomberg News said. A possible extension of the preference to uninsured depositors should be introduced after a phase-in period of several years to avoid driving up banks’ funding costs.

European policy makers are developing rules to limit risks to taxpayers in bank failures. Under measures being considered as part of a directive for recovery and resolution of credit institutions, regulators would be given statutory powers to impose losses on unsecured creditors, while holders of secured debt such as covered bonds would be protected.

“The note argues in favor of introduction in the European Union of depositor preference,” said the IMF’s office memorandum introducing the document. “There may be an opportunity to influence the debate in Europe on the draft Recovery and Resolution Directive.”

All EU nations are required to insure bank accounts with 100,000 euros (about $132,000) or less, a guarantee that was called into question by euro-area deliberations on a bailout for Cyprus. The 10 billion-euro Cypriot agreement ultimately spared insured depositors, while imposing losses on uninsured depositors, underscoring the need for new EU rules on who suffers when a bank can’t meet all its obligations.

The IMF staff is planning a longer version of the 13-page document to broaden the analysis of the issue beyond Europe. The May 9 note was prepared by the IMF’s monetary and capital markets department with the Legal Department.

Angela Gaviria, a Washington-based press officer at the IMF, declined to comment.

To contact the reporter on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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