Cyprus Losses Spur EU Lawmakers to Bolster Depositor Protection

The European Parliament will seek greater protection for depositors of crisis-hit banks in the wake of the Cyprus bailout as it weighs changes to proposals aimed at taking taxpayers off the hook for future rescues.

Lawmakers are planning to amend a draft European Union law on bank failures so that deposits would only be written down after losses have been imposed on other unsecured senior debt, according to Gunnar Hoekmark, the legislator leading the assembly’s work on the plans. The measure would apply to deposits greater than 100,000 euros ($130,900), as those below this threshold already benefit from government guarantees.

“Uninsured deposits should be within the scope,” of the so-called bail-in rules, Hoekmark said in an e-mail. “However, they should be given a preferential treatment in the hierarchy and rank above unsecured bondholders to make sure risks to depositors are minimized,” he said. The European Central Bank made a similar call last week for a so-called depositor preference.

Michel Barnier, the EU’s financial services chief, proposed creditor writedowns last year as part of a package of measures to end bailouts. National governments and the European Parliament are considering the plans against the backdrop of last month’s 10 billion-euro rescue deal for Cyprus, in which the island nation bowed to demands from creditors to shrink its banking system and write down deposits.

Insured Deposits

An earlier deal on the bailout that would have led to losses on depositors with less than 100,000 euros in their accounts was dropped after Cyprus’s parliament rejected the plan to eat into insured holdings.

National governments are also weighing changes to the draft law to boost protection of depositors in a bail-in, according to a document prepared by Ireland, which holds the EU’s rotating presidency.

Under those plans, regulators could take steps “in exceptional cases” to entirely exempt deposits from writedowns if the savings belong to individuals or small businesses.

Under Barnier’s plans, regulators would wipe out a failing bank’s capital, and then impose losses on its creditors in order of seniority, with deposits above 100,000 euros facing writedowns at the same stage as other uninsured senior claims. Debt that is secured by collateral or other assets would be exempt from the plans.

Under changes being discussed by parliament lawmakers, uninsured depositors would face losses “as a last resort” before public support is used, Philippe Lamberts, the lawmaker leading work on the rules for the parliament’s Green group, said in an e-mail.

Barnier’s proposals require approval from the parliament and by a majority of governments before they can take effect.

Nations have had intensive discussions on the draft law, and that work will now be stepped up in a bid to secure a deal, said a spokeswoman for the Irish presidency, who isn’t authorized to be cited by name, in line with official policy.

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