EU Weighs Minimum Bank Rule for Loss-Absorbing Liabilities

European Union nations are weighing whether globally systemic banks should be forced to meet common minimum rules on issuing unsecured debt and other liabilities that could be written down by regulators in a crisis.

Representatives from the European Union’s 27 nations today in Brussels discussed draft plans drawn up by Ireland, the holder of the EU’s rotating presidency, that would force globally systemically important banks to ensure that at least 6 percent of their total capital and liabilities would be in instruments that are eligible for forced losses, according to a document obtained by Bloomberg News. The total liabilities figure would be calculated in a way that doesn’t include the bank’s derivatives trades.

While the U.K., Netherlands and Finland have pushed for such a minimum rule to be included in a draft EU law on how regulators should handle bank crises, some other nations are opposed to the plan, according to an EU official. Finance ministers are set to seek a deal on the law at a meeting in Luxembourg on June 21.

Unsecured Debt

Under draft plans presented last year by Michel Barnier, the EU’s financial services chief, losses at a crisis-hit bank would be absorbed first by wiping out its capital, then writing down holders of unsecured debt in order of seniority. Holders of secured debt, such as covered bonds, would be shielded.

The document, dated June 18, doesn’t give a precise minimum figure for bank liabilities that should be eligible for such writedowns, and instead has a range of 6 percent to 10 percent of total capital and liabilities, excluding derivatives trades. The requirement would apply to banks judged systemically important by regulators, while rules for smaller lenders would be set by national authorities.

The Financial Stability Board, a global group bringing together regulators, central bankers, and finance ministry officials from the Group of 20 nations, has set criteria for determining if a bank is globally systemic. It publishes annual lists of which lenders have the designation.

Affected banks, such as Deutsche Bank AG, Barclays Plc and BNP Paribas SA, would be expected to comply by Dec. 31, 2016, according to the Irish document.

A spokeswoman for Ireland’s EU presidency, who couldn’t be named in line with government policy, declined to comment on the document. Ireland is aiming for a deal on the law at this week’s meeting of finance ministers, she said.

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