EU Holding Firm on Bank-Failure Rules Amid German Objections

  • Commission stopping short of 8% loss-absorption minimimum rule
  • Germany sees risk of `watering down' post-crisis rules

The European Commission is setting aside German objections and pushing ahead with a proposal to amend bank-failure rules introduced to end the era of expensive taxpayer-funded bailouts.

A discussion paper prepared by the commission for a meeting of national officials this week envisions setting European Union loss-absorbency requirements for its biggest banks, led by HSBC Holdings Plc and Deutsche Bank AG, in line with those issued in November by the Financial Stability Board for the world’s 30 most systemically important lenders.

The TLAC requirement “could be presumed to be sufficient and well calibrated to resolve the bank in the most likely resolution scenarios,” according to the document obtained by Bloomberg. “To set an additional firm-specific requirement, resolution authorities would need to demonstrate” that this level “is not sufficient to absorb losses and recapitalize the bank under resolution in the most likely resolution scenarios designed for that bank.”

The FSB’s rules on total loss-absorbing capacity, or TLAC, require banks to issue ordinary shares, subordinated debt and other potentially loss-absorbing securities equivalent to 18 percent of risk-weighted assets and 6.75 percent of leverage exposure by 2022.

‘Credible and Workable’

Yet Elke Koenig, head of the euro area’s bank-resolution authority, has repeatedly said that the currency bloc would exceed global standards to ensure its biggest banks can be restructured and recapitalized without threatening financial stability.

She has consistently spoken of a loss-absorbing baseline for top banks of 8 percent of total assets; in December, she said this equated roughly to 24 percent on a risk-weighted basis. This 8 percent figure corresponds to the amount of total liabilities, including own funds, that must be wiped out under EU law before a bank in resolution can tap into rescue funds built up from levies on the industry.

The German Finance Ministry has said that to have a “credible and workable” resolution system, the TLAC standard must be written into EU law “without watering down those bank-failure rules that have already been enacted.” It called for setting a minimum level in law, and warned against limiting the flexibility of resolution authorities to go higher.

The commission is working with EU member states on how to combine TLAC with EU standards, according to Olivier Guersent, the commission’s director general for financial stability and financial services. Among the issues to decide is whether, and to what extent, the TLAC standards should be applied to banks that are smaller but still of systemic relevance in individual countries, he told a conference in Brussels on Friday.

A commission official said that no minimum level of loss-absorbing liabilities had been included in the EU’s bank-failure law, and that this decision can’t be changed in implementing technical standards.

The commission paper shows that the thinking of the EU’s executive arm is following lines first sketched out in March. A proviso on the paper states that it is “intended to initiate debate” and “does not prejudge the position” of the commission.

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