EU to Toughen Creditor-Loss Rules at Failing Banks From August

The European Union is set to toughen its rules on state support for failing banks from Aug. 1, as it seeks to ensure that private creditors take a hit before taxpayers, and that bailed-out lenders face pay curbs.

The European Commission is scheduled to publish the updated bank state aid guidelines on July 10, according to an EU official, who asked not to be cited by name because the measures haven’t been made public.

The updated guidelines, which will take effect next month, will require shareholders and junior creditors at a failing bank to face losses before any government funds are provided, according to a draft of the plans obtained by Bloomberg News in May. Lenders would also be expected to abide by “strict executive pay policies,” according to the draft, drawn up by the staff of Joaquin Almunia, the bloc’s antitrust chief.

EU governments have provided 1.7 trillion euros ($2.2 trillion) of support to their banking systems since the 2008 collapse of Lehman Brothers Holdings Inc., according to commission data. Nations have dealt with failing banks in a variety of ways. While the Netherlands in February nationalized SNS Reaal NV without writing down unsecured senior debt holders, such bank creditors were in the firing line as part of the euro area’s bailout of Cyprus.

The state aid guidelines will be published on the same day that Michel Barnier, the EU’s financial services commissioner, presents draft legislation to centralize bank resolution in the euro area. Both initiatives are part of a series of actions by the EU to set common rules on bank failure that shift the burden to private creditors.

EU finance ministers last month brokered a deal on a draft law for how national regulators should handle crisis-hit banks. Those proposals, which must still be agreed on with European Parliament lawmakers, would only take full effect in 2018, leaving the state aid guidelines until then as the main EU reference point for how failures should be tackled.