Bloomberg News

Bondholder Losses Debated by EU to Avoid Bank Rescues

March 30, 2012

The European Union will seek views on the order in which unsecured senior bondholders and other creditors at failing banks should be forced to take losses as part of plans to end taxpayer bailouts of financial firms.

The EU may opt to place banks’ longer-term senior unsecured debt in the firing line for losses ahead of shorter-term senior claims, according to a consultation document published on the EU’s website. Liabilities with a maturity of less than one month may be entirely protected from forced losses, the paper says.

Writing down a bank’s creditors “must be an option” for regulators, Michel Barnier, the EU commissioner for internal market and services, told reporters today in Copenhagen. “There’s a big international consensus on the principle.”

Global regulators have called for so-called bail-in powers to write down bank creditors as part of a set of measures to prevent lenders from becoming too big to fail. Banks including Citigroup Inc. and Goldman Sachs Group Inc. have warned that writedowns for senior bondholders may make it more expensive for lenders to attract funding.

Barnier put the plans on ice last year on concerns that they could worsen the region’s fiscal crisis by making it more expensive for lenders to attract funding.

Senior Bondholders

“The commission really should just get on and publish the final proposals,” Syed Kamall, a U.K. conservative member of the European Parliament, said by telephone today. Rules for resolving a cross-border bank “should’ve been among the first proposals from the commission following the financial crisis,” he said.

Under the plans, senior debtholders would face losses after shareholders and holders of subordinated debt had their investments wiped out. Writedowns may also be applied to bank’s derivatives counterparties, the document says.

Barnier is considering forcing lenders to issue at least 10 percent of their debt in securities that would be eligible for bail-ins, the document says. It also sets out alternative scenarios for debt that could be eligible for writedowns.

The European Commission, the 27-nation EU’s executive arm, will seek views on the measures during the next month.

The commissioner said he would aim to present a draft law on winding down failed banks, including the plans for creditor writedowns, by a meeting of Group of 20 leaders in June.

The proposals will also include requirements for national governments to set up so-called "resolution funds," financed by banks, to cover costs from failing lenders, Barnier said.

‘Tricky Debate’

The commission has yet to determine what protection should be granted to bank debt that is issued before the bail-in law comes into effect, the document says.

The Danish government, which holds the EU’s rotating presidency through June and is hosting a meeting of the bloc’s finance chiefs that concludes tomorrow, also urged the European Commission to present a proposal on failed banks before July.

“There is a tricky debate on timing when it comes to this proposal. But since the debate has been around for quite some time, I think that the time is just about to mature and I do hope that the commission will make it before the Danish presidency is over,” Danish Economy Minister Margrethe Vestager told reporters today in Copenhagen. Ministers will discuss the plans tomorrow, she said.

Sweden’s finance minister Anders Borg said that it was imperative that governments be allowed to use public money to support crisis-hit lenders if they feel it’s the best option.

“We will be pushing for an absolute line when it comes to the ability to put common stock into a bank,” Borg told reporters. “If other features are there, we could also accept bail-ins,” he said.

To contact the reporters on this story: Jim Brunsden in Copenhagen at jbrunsden@bloomberg.net; Rebecca Christie in Copenhagen at rchristie4@bloomberg.net; Ben Moshinsky in London at bmoshinsky@bloomberg.net

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


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