Ailing Banks May Escape EU Rules to Impose Outside Management

Banks may win a partial reprieve from European Union proposals to parachute outside managers into lenders deemed at risk of failure.

Some EU nations are concerned that empowering regulators to send in these so-called special managers could “hasten the decline” of struggling banks, according to a document obtained by Bloomberg News. They prefer to allow this step when a bank is no longer viable, according to the document prepared by Ireland, which holds the EU’s rotating presidency. The Irish document, dated Jan. 11, didn’t identify the countries.

The “special manager” plans are part of a push by Michel Barnier, the EU’s financial services chief, to take taxpayers off the hook for bailing out banks. His proposals also would empower regulators to impose losses on senior creditors, and require nations to create so-called resolution funds that could stabilize crisis-hit lenders.

Barnier’s proposals would give powers to an appointed special manager, such as requiring the bank to boost capital, reorganizing the bank’s ownership structure, and line up a takeover of the business, according to a copy of the plans on the EU’s website. The new manager would replace the bank’s existing bosses and would normally be in the post for a maximum of one year.

The governments’ concerns are shared by Gunnar Hoekmark, a Swedish legislator in charge of the European Parliament’s work on the draft law. “Given the very intrusive character of the special-management tool it should, to my mind, not be an early intervention tool,” Hoekmark said in an e-mail.

Special Managers

France has indicated some support for empowering regulators to appoint special managers before a bank has failed, saying it could act as a useful deterrent to prevent lenders acting irresponsibly.

EU governments have provided as much as 4.6 trillion euros ($6.2 trillion) of capital injections, guarantees and other support to lenders since 2008, as nations scrambled to prevent a meltdown of the financial system following the collapse of Lehman Brothers Holdings Inc..

“Appointing special managers can be an effective tool to avoid a bank having to go into resolution,” Stefaan De Rynck, a spokesman for Barnier, said in an e-mail. “But our legislation leaves it up to the national authorities to decide whether to use this instrument and impose various measures on the bank before it is too late,” he said.

Irish Presidency

Ireland is leading discussions between EU nations on Barnier’s proposals, as part of its six-month presidency of the bloc. The country is seeking to broker a deal by the end of March so that talks can begin with lawmakers in the EU parliament, said an Irish spokeswoman who can’t be named, in line with official policy.

In parallel to the EU talks, some national governments in the 27-nation bloc are also weighing their own steps to prevent banks being too big to fail.

Bank of France Governor Christian Noyer last week defended his country’s draft rules for handling failing banks, which include the possibility to change management. Regulators should have maximum flexibility to name outside managers, he said.

The French legislation “needs to allow us to take emergency measures without accelerating ipso facto default. Recently, we’ve found it useful to be able to brandish the credible threat of a nomination,” Noyer told a committee in the French parliament.

Death Spiral

Under the EU plans, regulators would only resort to a special manager after trying other early intervention measures, such as forcing the bank’s management to draw up an action plan for recovery, and to replace some board members.

Banks have signaled concern that the EU proposals could push lenders into a death spiral.

Markets could see use of a special manager as “a signal that the bank was in trouble, which in turn could lead to a liquidity and funding crisis,” Oliver Moullin, a director at the Association for Financial Markets in Europe, said by phone. There is also a “very high chance that depositors will withdraw their money,” he said.

AFME represents international lenders including Deutsche Bank AG, BNP Paribas SA, HSBC Holdings Plc and Royal Bank of Scotland Group Plc.

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