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

The European Union will 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 published today updated bank state-aid guidelines requiring shareholders and junior creditors at a failing bank to face losses before any government funds are given. Rescued lenders would also have to apply a cap on total remuneration as long as they are under restructuring or relying on state support.

“Today’s changes of the crisis rules are based on the good practices of the last years in dealing with bank bail-outs and restructuring,” Joaquin Almunia, the EU’s antitrust chief, said. “Bank owners and junior creditors will need to contribute before any more taxpayers’ money is spent on bank bail-outs.”

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.

Restructuring plans, including a capital-raising plan, to demonstrate long-term profitability would have to be submitted before a bank may tap into recapitalization measures, the EU said.

Still, if financial stability is under threat, state aid for a bank can still be temporarily approved before the full restructuring plan is ready, the EU said. If the viability of the bank can’t be restored, an orderly winding down plan would need to be submitted instead, it said.

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