EU Nations Weigh More Creditor Loss Leeway in Bank Failure Law

European Union financial regulators may be given flexibility in assigning losses at failing banks, under a proposal circulated today by Ireland, which holds the bloc’s rotating presidency.

The Irish plan would give nations more scope than in previous drafts to grant exemptions from forced losses if the burden is shifted to other private creditors, rather than to backstop funds, according to the document dated today and obtained by Bloomberg News.

Under the plan, nations could shield specific types of unsecured creditors if including them would threaten financial stability or cause “value destruction that would leave other creditors worse off,” according to the draft.

EU finance ministers convene in Brussels this afternoon to continue battling over how to handle failing banks, aiming to break a deadlock that sent them home empty-handed after 19 hours of talks last week. Talks foundered on the question of which creditors face writedowns when banks fail.

Some countries demanded more flexibility for national authorities, while others sought strict rules across all 27 EU nations. Ministers considered several ways to set thresholds for losses that would need to be assigned via strict formulas before national discretion would be allowed.

Under the new Irish plan, regulators would be required to wipe out 8 percent of a bank’s unsecured liabilities, in order of seniority, before they would earn the write to grant exemptions and make up the shortfall with contributions from national resolution funds.

These national funds, financed through levies on banks, would be prevented from surpassing certain limits on the amount they could contribute.

These thresholds wouldn’t apply for exemptions where the shortfall is made up by simply shifting the burden to other creditors, although carve-outs would still have to be justified on financial stability or other grounds, according to the draft.