EU Lawmaker Opposes German Push to Speed Bank Loss Rules

The European Parliament lawmaker managing the bloc’s bank-resolution bill pushed back against a German-led effort to speed rules on creditor writedowns when lenders fail.

“Markets and investors need time to adjust,” Gunnar Hoekmark, a Swedish legislator in charge of the Brussels-based assembly’s work on a draft law handling bank failures in the 27-nation bloc, said in a post on Twitter. Rules imposing creditor writedowns will be most effective if they are implemented after other parts of the law have already come into force, he said.

Germany, Finland, the Netherlands and Denmark say so-called bail-in rules should be phased in by 2015 along with other parts of the law, rather than in 2018 as the European Commission has proposed, according to a briefing paper obtained by Bloomberg News. The four say investors are anticipating the new regime and delays could interfere with that process, according to the paper, prepared for March 21-22 technical meetings in Brussels.

Losses imposed on depositors and senior creditors in Cyprus roiled markets this week, as the EU continues to hash out how to handle failing banks on a case-by-case basis. The banking resolution law is under discussion now, and proposals are expected later this year to create a central agency to handle bank resolutions.

Cyprus became a testing ground for investor losses when euro-area authorities this week required restructuring of the country’s two biggest banks as a condition of a 10 billion-euro rescue. The Cyprus program, billed by European policy makers as a unique case, imposes losses on bondholders and uninsured depositors and was accompanied by capital controls to limit contagion.

ECB Supervision

EU lawmakers and national governments agreed on March 19 to a provisional deal to turn the European Central Bank into a supervisor for banks in the euro zone and other willing nations. The EU also is working on proposals to standardize procedures for insuring deposits and shutting down banks. Proposals for a common bank resolution framework are due later this year.

Nations are also weighing a proposal that would allow regulators to require banks to hold a minimum amount of a new class of convertible debt specifically designed to absorb losses if needed. This should be considered separately from the rules to facilitate writedowns, the paper from Germany, Finland, the Netherlands and Denmark said.

June Deadline

EU leaders have set a June deadline for governments and the European Parliament to agree on legislation setting out how authorities should handle bank failures, including through so-called creditor bail-ins. 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.

No decisions have been made on whether or how to alter the existing proposal, according to a spokesperson for Ireland, which holds the EU’s rotating presidency and is coordinating negotiations among nations, the European Commission and the European parliament. Spokespeople for Germany, Finland and the Netherlands declined to comment.

The document from Germany and its allies refers to EU Internal Market and Services Commissioner Michel Barnier’s current proposal on handling bank failures. Germany, Finland and the Netherlands renewed their call, now joined by Denmark, for the new rules to take effect in 2015, instead of 2018 as proposed, and said the new framework should be available as a way to break the vicious circle of countries and their banks dragging each other down.

“We strongly believe that making all tools in the directive available by 2015 will allow resolution authorities to safeguard taxpayers’ money more effectively with immediate positive consequences,” the document said.

“As soon as there are credible alternatives for financing bank failures, risks inherent to the banking sector will have a significantly weaker adverse impact on sovereign funding conditions,” the paper said.

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