Short-Term Bank Debt May Escape Bail-In, EU Lawmaker Says

Bank debt with a remaining maturity of six months or less may be exempted from compulsory writedowns by European Union regulators, said Gunnar Hoekmark, the EU lawmaker leading work on rules for failing lenders.

Such debt “could be an exemption” to avoid the creation of “volatility on the financial markets,” Hoekmark told legislators meeting in Brussels today. He said that a clear hierarchy was needed to set out which instruments would face forced writedowns. Such losses shouldn’t be limited to a special category of so-called bail-in-able debt, and as wide a range of securities as possible should be eligible for writedowns, he said.

The EU plans, which were presented in draft form last year by Michel Barnier, the bloc’s financial services chief, should also make it clear that governments can still bail out their banks with taxpayer money as a last resort, Hoekmark said.

EU governments have provided 4 trillion euros ($5.3 trillion) in guarantees, capital injections and other aid to banks since the global financial crisis erupted in 2007. The Group of 20 nations has called on lenders to draw up plans for how they could be wound down in a crisis, and has tasked regulators will drawing up measures to impose losses on failing banks’ creditors, so that taxpayers will not be called on in future.

‘Systemic Risk’

Some banks may be exempted from the rules entirely if they don’t pose a “systemic risk” to the financial system, Hoekmark said.

Hoekmark said that further work was needed on plans to force nations to set up bank financed funds that would be tapped to stabilize failing lenders. Governments have different views on whether to create such pre-financed funds, he said.

It is “very likely” that governments “will not agree that such a fund should be used cross-border,” said Wolf Klinz, a member of the parliament’s Liberal group working on the dossier.

Individual banks’ contributions to the resolution funds should be determined based on perceptions of their riskiness, said Elisa Ferreira, the lawmaker leading work on the file for the EU assembly’s Socialist group.

The final version of the law must be agreed on by lawmakers in the assembly and by national governments.

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