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ECB Bid for Fast Start to Bank Loss Rule Blocked by Nations

ECB Bid for Fast Start to Bank Loss Rule Blocked by Nations
A euro sign sculpture stands outside the European Central Bank headquarters in Frankfurt. Photographer: Ralph Orlowski/Bloomberg

The European Central Bank and Germany met resistance from national governments in their bid to bring forward the start date of European Union rules that would force losses on failing banks’ creditors.

France and Spain were among a large group of EU nations to weigh in against the proposal, which would have seen the start date of the so-called bail-in rules shunted forward to as early as 2015 from 2018, at a meeting of national ambassadors yesterday in Brussels, according to an EU official.

Nations were concerned that a faster timetable wouldn’t leave banks with enough time to prepare, said the official, who couldn’t be named in line with EU policy. The deadline is one of several splits between governments concerning the debt writedown powers, with France and the U.K. seeking to hand regulators the ability to exempt some creditors from losses, the official said.

EU leaders have set a June deadline for governments and the European Parliament to agree on the law, aimed at taking taxpayers off the hook for bank failures. In the absence of such a system, nations have injected 1.7 trillion euros ($2.2 trillion) into their banking systems since the 2008 collapse of Lehman Brothers Holdings Inc., according to European Commission data.

Michel Barnier, the EU’s financial services chief, proposed last year that, while most of the provisions in the law should take effect in 2015, the bail-in rules should be subject to a longer timetable to avoid spooking investors.

Unsecured Creditors

Under the plans, unsecured creditors at a crisis-hit bank would face losses in order of seniority, and before recourse is made to taxpayers.

ECB President Mario Draghi said last month that the bail-in rules should take effect “way earlier” than 2018, so that the EU has a clear road map for handling crises and can avoid “ad hoc” actions such as those used in the international bailout of Cyprus. He has mentioned 2015 as a possible start date.

A spokesman for the Frankfurt-based ECB declined to comment beyond referring to previous comments by Draghi and other ECB Executive Board members on the issue.

Chantal Hughes, a spokeswoman for Barnier, said that the commission could only support a 2015 start date for bail-in if there is a consensus among nations, and other parts of a so-called banking union plan to centralize oversight of euro-area lenders is in place.

Forced Writedowns

As well as the timing issue, Ireland, which holds the rotating presidency of the EU, is contending with splits between governments over possible exemptions from forced creditor writedowns, and over a related question of whether insured depositors should be given preferential treatment in bail-in situations.

The U.K. and France are among a group of countries calling for national regulators to be equipped with the power to grant such exemptions, if the step is needed to preserve financial stability.

Under the French plan, national regulators would be empowered to shield short term debt-holders, derivatives counterparties, and uninsured deposits belonging to individuals or small businesses, according to a copy of the proposals obtained by Bloomberg News.

The European Banking Authority would be empowered to veto exemptions, if it determined that no risk to financial stability existed.

Financial Stability

The U.K.’s suggested approach would hand regulators the right to grant carve outs for either stability reasons, or because trying to bail-in a particular type of security would cause unacceptable delays in resolving a bank.

Liabilities that are “governed by the law of a third country” and those caught up in “unresolved legal processes,” may fall into this category, according to a copy of the U.K. plans.

The U.K. government’s office in Brussels confirmed the authenticity of the document, and declined to provide further comment. The French government office in Brussels didn’t have a spokesman immediately available to comment.

The European Commission would ensure that the powers aren’t abused as part of its standard vetting of banks that receive state aid, according to the proposals.

The U.K. and French suggestions are being resisted by another group of nations over concerns that they would fuel investor uncertainty and make bail-ins less effective, the official said.

The legislation must be approved by governments in the EU’s Council of Ministers and adopted by the European Parliament before it can take effect.

German Finance Minister Wolfgang Schaeuble’s chief foreign press spokesman, Bertrand Benoit, wasn’t reachable when phoned to seek comment on yesterday’s meeting.

Ireland told ambassadors that further talks will be held on the bail-in rules, according to the official. The law is set to be discussed by finance ministers on May 14.

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