Protecting Bank Debt Would Cost EU Taxpayers, Report Says

Protecting senior unsecured bank debt may cost “more than EU taxpayers can bear” and investors should be liable for their decisions, a committee of advisers to the European Systemic Risk Board said in a report today.

“The examples of Ireland and Spain suggest, already at the national level, that the full protection of all senior creditors may exceed the government’s fiscal capacity,” the Advisory Scientific Committee said in the report on its website.

The committee also is “concerned” about the recapitalization of Spanish banks without determining the actual losses of the banks first.

“Adding capital without knowing what the assets are actually worth and how much capital is really needed entails a serious risk that the funds may simply be lost as the necessary resolution of the banks is delayed further,” according to the report.

The committee supported the creation of a European bank supervisor and a European Resolution Authority to deal with failing lenders. The authority should be financed primarily by a levy on banks, the committee said.

The European Systemic Risk Board was set up in January 2011 to help detect risks in the financial system.

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