Photographer: Thomas Lohnes/Getty Images

Germany on Track for New EU Clash Over Bank-Failure Rules

  • Finance ministry insists on 8% bail-in minimum for big banks
  • Berlin warns against “watering down” EU's own regulations

Germany is on a collision course with the European Commission over enforcing bank-failure rules the European Union introduced two years ago to end an era of taxpayer bailouts.

The finance ministry in Berlin is warning against “watering down” the rules, including a requirement to impose losses on investors and the introduction of powerful authorities overseeing bank failures. Its warning comes shortly after a discussion paper of commission staffers suggested softening those rules in upcoming legislation.

The positioning of Europe’s biggest economy and the bloc’s executive body comes in the early stages of a debate over how to implement rules for the world’s too-big-to-fail banks endorsed by the Group of 20 nations last year.

“To have a credible and workable EU resolution regime, it is key to transpose the G20 agreement on total loss-absorbing capacity into EU law without watering down those bank-failure rules that have already been enacted,” the ministry said in an e-mailed response to questions.

While Germany insists on an austere reading of the post-crisis rulebook, the EU’s financial-services chief Jonathan Hill has said he’ll take into account the impact these rules -- mostly introduced by his predecessor Michel Barnier -- have on European business amid lackluster growth and pallid lending.

Losses on Shareholders

The requirement to impose lenders’ losses on shareholders and creditors is a key element in the EU’s quest to halt taxpayer rescues. In its Bank Recovery and Resolution Directive enacted in 2014, it requires that the equivalent of 8 percent of a failing bank’s equity and debt is wiped out before it can access the newly installed industry-financed rescue funds.

While that requirement only becomes relevant once a bank hits the wall, Germany’s finance ministry said the new legislation should require big banks to show in advance that they have enough equity and eligible debt to meet that rule should it be needed.

In its March discussion paper, the commission instead proposed as the main benchmark the G20-endorsed requirements for total loss-absorbing capacity, issued last November for the world’s 30 most important lenders including HSBC Holdings Plc and Deutsche Bank AG. Under those rules, defined by the Financial Stability Board, banks must have eligible securities equivalent to 18 percent of risk-weighted assets, or 6.75 percent of a bespoke measure similar to total assets.

‘Proportionate, Necessary’

The 8 percent of total assets required by the EU’s own laws would only be needed in advance under certain conditions, under the rules proposed in the commission’s discussion paper. Resolution authorities -- such as the Single Resolution Board in the euro area -- would only be able to impose a requirement exceeding the FSB’s under a series of conditions that aren’t part of the existing legal text.

They would need to consider a “resolvability assessment” of the bank and whether extra requirements are “proportionate and necessary,” the document stipulates. A high requirement “would need to be substantiated as necessary on grounds of potential loss absorption needs,” according to the document, meaning the authority would need to show the bank “is likely to incur the extent of losses that justify such a high calibration.”

For Germany, the 8 percent hurdle should be the minimum rather than require justification, the finance ministry said in its statement.

“The resolution authorities should continue to have full discretion to request the amount of bank-specific add-ons deemed necessary for smooth resolution,” the ministry said. “It should be required that at least the biggest banks have to have a minimum requirement of own funds and eligible liabilities of at least 8 percent of total liabilities.”

The EU should also introduce legislation that ensures a creditor hierarchy in necessary countries so losses can be imposed on bondholders, according to the finance ministry. EU members including Germany, France, Italy and Spain have taken different routes toward that goal.

“As foreseen in the TLAC standard, mandatory subordination of all TLAC-eligible liabilities is needed,” the ministry said.

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