The European Union should scale back plans to write down unsecured bondholders at failing lenders as they risk causing a bank run, according to an EU lawmaker.
Gunnar Hoekmark, the member of the European Parliament leading work on the draft rules, also said the EU should weaken planned powers for regulators to parachute managers into banks and to demand changes in their structures and operations.
The draft EU measures “represent a far-reaching interference with property rights in banks,” Hoekmark said in an assessment published on the parliament’s website. For the “sake of legal certainty and transparency it is vital to distinguish between the phases where the shareholders of an institution are still in full control” and the phase “where control is seized by the resolution authority,” according to the report.
Michel Barnier, the EU’s financial services chief, has called for sweeping powers for regulators to take control of failing banks and write down their creditors as part of a push to take taxpayers off the hook for rescues. His plans must be approved by governments and by lawmakers in the parliament before they can take effect.
Barnier’s proposal for writing down unsecured creditors may “increase systemic risk and give market participants incentives to start a bank run” unless it includes safeguards, according to Hoekmark’s report.
To counter this, debt with an original maturity of six months or less should be excluded from the measures, according to the report.
Hoekmark also calls for the EU to partly scrap proposals that would force nations to set up bank-financed funds that would stabilize lenders in crisis, and that would lend to each other as a last resort.
While banks should be required to pay a fee to governments to cover the cost of bank rescue efforts, this money shouldn’t have to go into a specific fund, according to the report. Nations should only be required to assist each other in stabilizing a bank if the lender has cross-border operations, Hoekmark argues.