Euro Bank-Failure Talks Seen Eased by EU Writedown Deal

Photographer: Jock Fistick/Bloomberg

EU Financial Services Chief Michel Barnier said, “With these new rules in place, massive public bail-outs of banks and their consequences for taxpayers will finally be a practice of the past. Close

EU Financial Services Chief Michel Barnier said, “With these new rules in place,... Read More

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Photographer: Jock Fistick/Bloomberg

EU Financial Services Chief Michel Barnier said, “With these new rules in place, massive public bail-outs of banks and their consequences for taxpayers will finally be a practice of the past.

A European Union agreement on rules for handling failing lenders will ease progress in talks next week on a bank-resolution authority and backup fund for the euro area, lawmakers and analysts said.

The bill, which must be adopted by the European Parliament and member states, includes requirements for forced creditor losses and a plan for national bank-financed resolution funds. The compromise attained late yesterday in Strasbourg, France, is seen as a prerequisite for creating a Single Resolution Mechanism -- a centralized system for intervening in stricken euro-area lenders.

“This should facilitate the negotiations in the European Parliament” and among EU finance ministers “so that we can have an overall deal on the SRM before the end of this term,” Gunnar Hoekmark, the assembly’s lead legislator on the dossier, said in a statement today.

The EU is racing to push through a raft of legislation aimed at bolstering controls on the financial industry before the parliament shuts down for elections in May. Governments have said the Bank Recovery and Resolution Directive, as the bill is called, is needed to prevent a repeat of the state-funded rescues that occurred after the 2008 collapse of Lehman Brothers Holdings Inc.

‘Massive Public Bailouts’

Between October 2008 and October 2011, governments made available 4.5 trillion euros ($6.2 trillion) in approved bank assistance, according to European Commission data, including 409 billion euros in asset relief and recapitalization.

“With these new rules in place, massive public bail-outs of banks and their consequences for taxpayers will finally be a practice of the past,” said Michel Barnier, the EU’s financial services chief. “The new rules provide authorities with the means to intervene decisively both before problems occur and early on in the process if they do.”

Sharon Bowles, chairwoman of the parliament’s Economic and Monetary Affairs Committee, said the rules provide an “anchor” for next week’s talks. The bill sets out “the rules and methods to be used by the common authority,” Hoekmark said.

Euro-area finance ministers convene in Brussels on Dec. 17 to discuss the SRM, followed by a meeting of all 28 EU ministers the following day. EU leaders made the plan a top priority for their Dec. 19-20 summit.

Stress Tests

Under the compromise reached yesterday, rules on creditor writedowns at stricken banks would come into force on Jan. 1, 2016. These go beyond current EU state-aid rules, which require shareholders and junior bondholders to absorb losses before governments can provide assistance, by also placing senior unsecured creditors in the firing line.

The rules explicitly shield bank deposits of as much as 100,000 euros from any forced losses, while granting preferential treatment to savings in excess of this amount. Deposits over the 100,000 euro threshold would take a hit only after other unsecured creditors had been wiped out.

Secured liabilities such as covered bonds and short-term interbank lending would be exempted from writedowns. National governments could also seek European Commission approval to grant ad hoc exemptions to creditors on the basis that bailing them in would do more harm than good.

“There are still major question marks over legal aspects for implementing the use of resolution funds as well as for the circumstances in which a bail-in might be avoided,” Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland, said by e-mail.

Solvent Banks

The bill accommodates calls from national governments to be allowed to inject capital into solvent banks if they perform poorly in stress tests and are unable to raise capital in the market. This option would only be available as a last resort, the bill states.

The draft legislation also leaves open the possibility for governments to temporarily nationalize a bank if they judge that its failure would threaten financial stability. Some creditor losses and other restrictions would nevertheless apply. The parliament made this point a priority in its negotiations with the Council of the European Union, the EU body that represents member states.

EU countries would be required by the bill to build up resolution funds for banks over a 10-year period, with standing resources equivalent to 1 percent of state-insured deposits in each country.

‘Major Step Forward’

A general rule in the draft law requires 8 percent of a bank’s liabilities to be wiped out before recourse can be made to backstops or other assistance.

If approved, the new rules would come into force on Jan. 1, 2015, with the exception of the bondholder bail-in provisions.

“Last night’s agreement is a major step forward which will increase the resilience of banks and, where necessary, manage their failure in an orderly way,” Alexandria Carr, a regulatory lawyer in the London office of Mayer Brown, said by e-mail.

Yet fundamental questions remain, she said. “Does it introduce the possibility of a two-tier recovery and resolution system, whereby the more affluent member states would still bail-out while the poorer member states impose bail-in? Will this affect competition? What will the funding impact on banks be? Finally,does bail-in interfere with the property rights of bank creditors?”

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net; Ian Wishart in Strasbourg, France at iwishart@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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