Bloomberg News

EU’s Almunia Says New Bank-Guarantee Rules ‘Better Reflect’ Risk

December 01, 2011

Dec. 1 (Bloomberg) -- Joaquin Almunia, the European Union’s antitrust chief, said that overhauled state-aid rules on bank guarantees to be published today better reflect the risks to the government of providing the support.

The “pricing formula fees for guarantees better reflect underlying” risk, he said at a conference in Brussels today. Almunia also said that revised rules would also cover the remuneration for states that buy ordinary shares in lenders to boost their capital.

“Ordinary shares will be a common way to inject capital into banks” under new moves to increase quality of capital, Almunia said.

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, according to two people familiar with the situation. 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.

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 yesterday, citing details of the draft measures.

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 and Jim Brunsden in Brussels. Editors: Peter Chapman, Jones Hayden

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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