Bloomberg News

EU Bank Writedown Plan Is Said to Exclude Pre-2013 Debt

December 13, 2011

(Updates with comment from regulatory lawyer in fourth paragraph. For more on the region’s debt crisis EXT4.)

Dec. 1 (Bloomberg) -- The European Union may exempt bank debt issued before 2013 from proposals forcing investors to take losses at failing lenders, said a person familiar with the plan.

Excluding the debt is designed to prevent lenders’ funding costs from rising, said the person, who declined to be identified because the discussions are private. The exemption could be extended if banks struggle to raise funds, the person said. The law would need approval from national governments and the European Parliament before taking effect.

Michel Barnier, the EU’s financial services chief, has promised to propose draft rules to end the need for taxpayer bailouts of failing banks. The Bloomberg Europe Banks and Financial Services Index has fallen more than 33 percent in the past year on concern lenders have been weakened by the European sovereign-debt crisis.

“From a funding point of view it brings two words to mind -- cliff effect,” Bob Penn, financial regulation partner at Allen & Overy LLP, said in a telephone interview in London today. “There’ll be swathes of bank-funding issuance and then it will fall off a cliff” when the so-called bail-in rules are implemented.

Under draft proposals obtained by Bloomberg News, holders of long-term unsecured senior debt in a collapsing bank would be first in line to take losses once a lender’s capital and other subordinated debt is exhausted. Long-term bonds would be those with a maturity of more than one year.

A spokeswoman for the European Commission declined to comment on the draft law.

Last Resort

Short-term debt, with a less than one-year maturity, and derivatives should only be written down by regulators as a last resort if losses from longer-term debt aren’t “sufficient to restore the capital of the institution and enable it to operate as a going concern,” according to the draft.

“Exempting short-term debt and derivatives may be justifiable, but this would increase the use of systemically risky derivatives and excessive levels of short-term debt that contributed to the ongoing crisis,” said Sony Kapoor, managing director of policy advisory firm Re-Define. Taxing them “may help alleviate some of these distortions.”

Regulators would also have the power to forcibly convert a bank’s bonds into ordinary shares, according to the draft.

Forced Conversions

Authorities could intervene to impose losses if a bank was “likely, in the near future,” to breach its minimum required capital levels, or be unable to meet its obligations to creditors, according to the EU document.

There is a “growing acceptance on the part of regulators” that the wind-down plans “have to be implemented in a way which does not overly conflict with the ability of financial institutions to refinance themselves in the near-term,” Richard Reid, research director for the International Centre for Financial Regulation, said in an e-mail.

The cost of insuring debt sold by financial companies fell on speculation the European Union will ease bank-funding costs. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers declined 12.5 basis points to 285.5 and the subordinated gauge was 20 lower at 507. The benchmarks are down for a fourth day after falling yesterday by the most in five weeks.

Crisis Disputes

Efforts amid the debt crisis to force investors to share in bailout costs have roiled markets and sparked disputes among policy makers. Last week, German Finance Minister Wolfgang Schaeuble suggested European governments may ease provisions in a planned permanent rescue fund requiring bondholders to share losses in sovereign bailouts.

Other parts of the commission plans include giving regulators the power to force healthy banks to sell off parts of their business so that they could be wound up in a crisis. This process is known as bank “resolution.”

“We need to put resolution regimes in place for every type of institution,” Paul Tucker, deputy governor of the Bank of England, told reporters at a Financial Policy Committee press conference in London today.

Tucker said he expected the EU’s rules “to be compliant with the Financial Stability Board’s standards in this area.”

Euro-area banks need to refinance 35 percent more debt in 2012 than they did this year, the Bank of England said in its financial stability report today. Lenders have more than 600 billion euros ($808 billion) of debt maturing next year, around three quarters of which is unsecured, according to the study.

‘Funding Strains’

“That will be expensive to replace if current funding strains persist,” the bank said in the report. “The volume of prospective bank refinancing, at the same time as significant sovereign-debt refinancing, means bank-funding markets are vulnerable to future shocks.”

EU leaders last month agreed to offer their banks temporary guarantees on their debt issuance as part of a package of measures to restore confidence in lenders. Finance ministers agreed yesterday to coordinate the national guarantee programs, while rejecting proposals to pool them.

--Editors: Peter Chapman, Stephen Taylor

To contact the reporters on this story: Jim Brunsden in Brussels at; Ben Moshinsky in London at

To contact the editor responsible for this story: Anthony Aarons at

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