Photographer: Alessia Pierdomenico/Bloomberg via Getty Images

Schaeuble Says Italy Bank-Liquidation Aid Shows Rule Discord

  • German finance minister says Veneto banks case raise questions
  • Dijsselbloem, Schelling join ministers calling for discussion

German Finance Minister Wolfgang Schaeuble joined his counterparts from the Netherlands and Austria in calling for a review of European Union bank-failure rules after Italy won approval to pour as much as 17 billion euros ($19.4 billion) of taxpayers’ cash into liquidating two regional lenders.

Schaeuble said Italy’s disposal of Banca Popolare di Vicenza SpA and Veneto Banca SpA revealed differences between the EU’s bank-resolution rules and national insolvency laws that are “difficult to explain.” That’s why finance ministers convening in Brussels on Monday have to discuss the Italian cases and consider “how this can be changed with a view to the future,” he told reporters in Brussels before the meeting.

Dutch Finance Minister Jeroen Dijsselbloem said the focus should be on EU state-aid rules for banks that date from 2013, before the resolution framework was put in place. Italy relied on these rules for its state-funded liquidation of the two Veneto banks and its plan to inject 5.4 billion euros into Banca Monte dei Paschi di Siena SpA.

The EU laid down new bank-failure rules in the 2014 Bank Recovery and Resolution Directive after member states provided almost 2 trillion euros to prop up lenders during the financial crisis. The BRRD foresees small banks going insolvent like non-financial companies. Big ones that could cause mayhem would be restructured and recapitalized under a separate procedure called resolution, in which losses are borne by owners and creditors, including senior bondholders if necessary.

Loss-Absorbing Debt

Elke Koenig, head of the euro area’s Single Resolution Board, said last week that the framework for failing lenders needs to be reviewed to “see how to align the rules better.” The EU commissioner in charge of financial-services policy, Valdis Dombrovskis, said that this could only happen once banks have built up sufficient buffers of loss-absorbing debt.

The EU’s handling of the Italian banks was held up by U.S. Federal Reserve Bank of Minneapolis President Neel Kashkari as evidence that requiring banks to have “bail-in debt” doesn’t prevent bailouts. The idea that rules on loss-absorbing liabilities that can be converted to equity or written down to cover the costs of a bank collapse “rarely works this way in real life,” he wrote in an op-ed in the Wall Street Journal.

In the wind-down of the two Veneto banks, Koenig’s SRB decided that resolution under BRRD wasn’t warranted because of the firms’ small size. That meant Italian authorities were free to dispose of the lenders under national insolvency law, using public funds and shielding senior bondholders from losses they would have faced under BRRD. Italy’s plan relied on EU state-aid rules set out by the European Commission in the 2013 Banking Communication.

‘Tough Rules’

“What we don’t want to see happening is that particular routes for finding solutions for banks that are in trouble would be incentivized to try and avoid the tough rules of the BRRD,” Dijsselbloem said after Monday’s meeting of euro-area finance ministers. “We need to make absolutely sure that this doesn’t happen.”

Dijsselbloem said ministers hadn’t criticized decisions made by national authorities. “They took the decisions within all the legal frameworks and there’s no question about that as far as the ministers are concerned,” he said. “There are lessons to be learned for the future.”

In tackling a major problem facing many EU banks -- a mountain of bad loans -- a one-size-fits-all solution probably won’t work, Dijsselbloem said, because levels of nonperforming loans vary by country and even by bank.

“We’ve learned from the past that in order to create the right markets for NPLs you would want to distinguish between the types of assets, and that is a much better way to move forward instead of creating one big asset management company dealing with very different and huge amounts of very different assets,” he said.

— With assistance by Ian Wishart, Jonathan Stearns, Marine Strauss, Mark Deen, John Martens, and Viktoria Dendrinou

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