EU Assembly Seeks Depositor Preference in Bail-In Law Deal

Uninsured depositors would be placed last in line for forced losses, or bail-ins, at failing banks under draft plans agreed on by the European Parliament, according to the assembly’s lead legislator on the measures.

Lawmakers from the “major political groups” included the change in a draft accord on legislation aimed at shielding taxpayers from having to rescue banks, Gunnar Hoekmark, a Swedish member of the EU parliament, told reporters in Brussels. Unsecured debt with a maturity of less than one month and deposits of as much as 100,000 euros ($130,000) would be exempted from losses, he said.

There is a “broad majority” in favor of the proposals, which must be negotiated with national governments, Hoekmark said. A vote in the assembly’s Economic and Monetary Affairs Committee will be scheduled “as soon as possible,” he said.

Michel Barnier, the EU’s financial services chief, proposed creditor writedowns last year as part of a package of measures to tackle too-big-to-fail lenders. National governments and the EU Parliament are considering the plans against the backdrop of last month’s rescue deal for Cyprus, in which the island nation bowed to demands from creditors to shrink its banking system and write down deposits of more than 100,000 euros.

Cyprus Losses

Cyprus’s parliament voted against an earlier accord that would have also imposed losses on savers with less than 100,000 euros. Such so-called insured deposits are protected under EU law, which requires nations to make reimbursements.

“My aim has been to achieve as much legal clarity as possible” Hoekmark said. The example of Cyprus shows that “if you don’t have very clear rules you can take decisions which are questionable.” Deposits greater than 100,000 euros would be “last” in line for losses, he said.

The parliament plans would also see varying treatment of over-the-counter derivatives depending on whether the instruments have been traded via clearinghouses, Hoekmark said. Those that haven’t passed through central clearing would face losses ahead of those that had, he said.

Secured debt, such as covered bonds, would be protected from losses under the plans.

Once the parliament has voted on the plans, lawmakers will negotiate with national governments on the final version of the law.

Alternative Approach

Diplomats are weighing an alternative approach to bail-in that would see regulators handed the power to exempt some classes of creditors from losses on a case-by-case basis. Nations are split on whether uninsured depositors should be given preferential treatment over other unsecured senior creditors.

The parliament will seek to revise proposals from Barnier that would require nations to set up permanent bank-financed resolution funds that could be tapped when a lender is in crisis, Hoekmark said. The measure, opposed by the U.K., would be amended to allow governments to put the money raised from levies into their general accounts, rather than a standing fund.

Lawmakers have also agreed on provisions that would make it clear that a government can temporarily nationalize a bank if they think it’s the best course to preserve financial stability, Hoekmark said.