European Union lawmakers clinched a deal on a bill that will force banks to pay into standing funds that would be tapped to protect depositors when lenders fail.
The European Parliament and officials from Lithuania, which holds the EU’s rotating presidency, agreed late yesterday that each of the bloc’s countries should build up a bank-financed fund equivalent to 0.8 percent of guaranteed deposits. Both parliament and member states must pass the compromise bill for it to become law.
“This is a good day for the taxpayer and for depositors. We have further severed the link between taxpayers and banks, and depositors will be able to receive their money more quickly,” Peter Simon, the legislator leading the parliament’s work on the rules, said in an e-mail.
The Directive on Deposit Guarantee Schemes, as the draft law is known, is part of the EU’s push to centralize control of financial services and to make sure taxpayers no longer foot the bill for banks in crisis. Last week an agreement was reached on rules for handling failing EU lenders.
That legislation, the Bank Recovery and Resolution Directive, also required banks to contribute to funds equivalent to 1 percent of covered deposits for defraying the costs of saving or shuttering lenders.
The deposit-guarantee and resolution funds would both be built up from levies on banks over 10 years. They could lock up about 126 billion euros ($174 billion), according to commission estimates, even as the European Central Bank is pushing banks to boost lending, especially to small and medium-sized companies.
Yesterday’s agreement was clinched as a separate debate was held in Brussels among euro-area finance ministers on a proposed Single Resolution Mechanism, backed by a common fund. This central authority, proposed by EU financial-services chief Michel Barnier, would complement ECB supervision of euro-area banks, which begins in full next November.
The deposit-guarantee deal is the result of three years of talks on the plans, which are aimed at boosting bank depositors’ confidence after a financial crisis that included a run on U.K. lender Northern Rock Plc.
While policy makers including Dutch Finance Minister Jeroen Dijsselbloem and officials at the ECB have called for the euro area to go further and set up a common deposit guarantee scheme, such a move has been strongly resisted by Germany.
‘Concentrated Banking Sectors’
While the deal normally requires the funds to be at 0.8 percent of covered deposits, this figure can drop to 0.5 percent for nations with “concentrated banking sectors,” according to a statement released by the parliament. The European Commission would have to give its approval before a nation could opt for the lower fund size.
France will be an obvious beneficiary of this special rule, Sven Giegold, a German lawmaker representing the assembly’s Green group in the talks, said by telephone.
EU parliament lawmakers’ successes in the negotiations including raising the combined target level of the resolution and deposit guarantee funds higher than foreseen by national governments, Giegold said.
The deal requires that at least 70 percent of a bank’s contributions to the fund will need to be in cash and on time, with payment of as much as 30 percent allowed to be deferred to a subsequent year. The 10-year deadline to build up the funds could be extended by as many as four years in cases when a large payout is needed during the transition period.
The agreement focuses on national practices, and updates existing EU legislation that already requires nations to guarantee bank deposits of as much as 100,000 euros. The current law contains no requirement for banks to pay into standing funds, meaning in practice that in many cases public money is used first, with governments then reimbursed through financial industry levies.
In addition to requiring nations to set up such standing funds, the draft law also seeks to shorten deadlines for depositors at failed banks to get access to their money. The deadline for full reimbursement will drop to seven days, with the caveat that this limit will only become fully binding on nations from 2024.
The deal needs to be formally approved by governments and the parliament before the legislation can take effect.
“These new rules will benefit all EU citizens: not only will their savings be better protected, but they will also have the choice of the best savings products available in any EU country without worrying about differences in the level of protection,” Barnier said in an e-mail. “We are taking another important step towards completing the single rulebook on crisis management for credit institutions in the EU.”
The issue of protecting bank depositors was pushed to the top of the political agenda earlier this year when Cyprus became the fifth euro-zone country to tap international aid in Europe’s sovereign-debt crisis. The rescue talks roiled markets as Cypriot lawmakers rejected an initial plan that included a tax on insured bank deposits.
The government then agreed to a new accord that shuttered Cyprus Popular Bank Pcl, the second-largest lender, and imposed losses on depositors with more than 100,000 euros.
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