EU Battles Over Rules on Investor Losses When Banks Fail

European Union finance ministers are battling in Luxembourg over how they’ll set rules for assigning losses when banks fail.

The new rules will set standards for how to prop up or shut down failing banks, along with requirements for the kind of backstops each country must have in place. During staff-level talks this afternoon, nations were considering requiring a certain level of losses on bank creditors before they could shield specific investors from writedowns, according to two EU officials.

Finance ministers also sought to bridge differences between countries inside and outside the 17-nation euro zone. Austria and the European Commission sought common rules for all 27 EU members, while the U.K., Sweden and others argued for rules that grant more freedom to non-euro nations.

Lithuanian Finance Minister Rimantas Sadzius said there are “objective differences” between countries inside and outside the currency bloc. At the same time, there are banks that operate in both regions.

“If we want this so-called level playing field, or fair competition, we must look at what could distort this competition and somehow compensate for it,” Sadzius said in an interview. He said regulators must weigh methods of financing of lenders, “when they can have liquidity from the European Central Bank or must ensure liquidity from somewhere else.”

ECB Oversight

European leaders are struggling to reassure investors that they will break the cycle of contagion between banks and sovereign debt by creating a banking union. Five of the euro zone’s 17 nations have sought rescues during more than three years of financial crisis, prompting leaders to call for unified bank supervision within the currency zone.

The ECB, now slated to take up bank supervision powers next year, insists that nations need procedures to handle failing banks -- including financial backstops -- before the transition takes place.

One track of the talks involves how to allow the U.K. to pursue separate financing procedures for setting aside funds when banks fail. The U.K. already collects crisis-cleanup fees from its banks and has budget arrangements in place to handle banking-sector woes.

France and the U.K. want regulators to have broad powers to choose which investors should be protected when banks fail if wiping them out would spark contagion. Denmark, Finland and the Netherlands counter that all nations need to follow the same rules, or risk driving up funding costs for banks in nations with stricter procedures or weaker public finances.

‘Certain Limits’

“France wishes flexibility,” French Finance Minister Pierre Moscovici told reporters as talks began. “We are willing to consent to certain limits.”

Under drafts of the bank-failure rules, 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. Finance ministers also are considering a full exemption for short-term inter-bank lending, a move supported by the ECB.

Swedish Finance Minister Anders Borg said that current bail-in proposals are “too rigid” and would create “illiquidity risks” for his country’s banks. Speaking to reporters at the start of today’s meeting, he called for a “dramatic increase” in the flexibility offered to non-euro countries.

Unsecured Debt

Governments are also split over whether the law should force systemically important banks to issue a minimum amount of unsecured debt and other liabilities that could be written down in a crisis.

While such an approach has been advocated by the U.K., Netherlands and Finland, on the grounds that it would make creditor writedowns more effective in practice, it faces opposition from a group of other nations led by Germany and France. Nations resisting the move argue that no assessment has been carried out of the impact the plan would have on bank funding costs, and also that different banks may require different targets.

Ministers are in for “a long day,” ECB Executive Board member Joerg Asmussen told reporters on his way into the meeting. EU Economic and Monetary Affairs Commissioner Olli Rehn said there was a “fair chance” of a deal while acknowledging the scale of the task ahead.

(Updates with comments from Sadzius starting in fourth paragraph. For more on Europe’s debt crisis, see TOP CRIS.)
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