Bloomberg News

EU to Overhaul Bank State-Aid Rules Amid Sovereign-Debt Crisis

November 30, 2011

Nov. 30 (Bloomberg) -- European Union regulators may shield banks from paying extra costs for guarantees from governments embroiled in Europe’s sovereign-debt crisis under an overhaul of state-aid rules to be published tomorrow.

The European Commission’s updated rules on state aid for lenders may dilute the effect of turmoil in the euro area on the fees that banks have to pay for guarantees on their loans and bonds, two people familiar with the situation said last week. Under the plans, the formula for setting the fees would reduce the impact of soaring debt-insurance costs faced by the country giving the backstops, one of the people said.

“Renewed tensions” in financial markets are forcing EU regulators to extend into 2012 special state aid rules for banks that have allowed governments to inject billions of euros into the industry, EU Competition Commissioner Joaquin Almunia said this month. He said he was planning to “clarify and update the rules on pricing and other conditions.”

Moody’s Investors Service Inc. said this week that banks in 15 European nations, including the largest lenders in France, Italy and Spain, may have their subordinated debt ratings cut to reflect the potential removal of government support.

The EU may ease restructuring requirements for banks with capital shortfalls that are a direct result of European sovereign debt losses, the Financial Times Deutschland reported today, citing details of the draft measures.

Pricing of Guarantees

Cristina Arigho, a spokeswoman for the commission in Brussels, declined to comment on the content of EU measures.

Some EU governments are calling for regulators to reconsider the planned changes to pricing bank guarantees, according to a document obtained by Bloomberg News yesterday.

EU governments spent 757 billion euros ($1 trillion) in state guarantees for banks from October 2008 until December 2010. EU regulators have ordered banks that received bailouts to shrink their balance sheets and change their business models.

Under current rules, a bank that gets a state guarantee pays a fee to the government according to a pricing formula partly based on the lender’s credit-default swaps between January 2007 and August 2008.

--With assistance from Esteban Duarte in Madrid. Editors: Peter Chapman, Heather Smith

To contact the reporter on this story: Aoife White in Brussels at awhite62@bloomberg.net.

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.


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