Bloomberg News

EU Said to Weigh Limits on When States Can Shield Bank Creditors

June 21, 2013

European Union nations are considering forcing nations to impose a certain level of losses on bank creditors before they could shield specific investors from writedowns, according to two EU officials.

France and the U.K. want regulators to have broad powers to choose which investors should be protected when banks fail if wiping them out would spark contagion. Denmark, Finland and the Netherlands counter that all nations need to follow the same rules, or risk driving up funding costs for banks in nations with stricter procedures or weaker public finances.

A compromise floated during a meeting of EU finance ministers in Luxembourg today would set conditions on when regulators have flexibility on shielding certain classes of unsecured creditors, such as pension funds or uninsured depositors. The rules may limit the total amount of protected liabilities and also require a certain level of writedowns according to the law’s creditor hierarchy.

Negotiations on new rules for how to handle failing banks began in Luxembourg this afternoon and are expected to continue for hours. It’s not clear how close finance ministers will get to a deal today.

As part of efforts to end the euro area’s debt crisis, EU nations must decide on rules for propping up or shutting down banks that can’t survive on their own. All 27 EU nations will need to follow the new rules, which may apply differently to countries inside and outside the currency bloc.

Backstop Funds

Nations must decide which creditors are in line for losses, how regulators can step in when a bank is in trouble, and how to build government backstop funds. Talks today started out at the technical level, with multiple working groups tackling different elements of the regulation.

One track of the talks involved how to allow the U.K. to pursue separate financing procedures for setting aside funds when banks fail. The U.K. already collects crisis-cleanup fees from its banks and has budget arrangements in place to handle banking sector woes.

The new EU rules are expected to require countries to collect fees from their banks and set aside a dedicated fund for covering the cost of regulator action when banks fail. Germany is reluctant to give the U.K. leeway on how this fund is set up, for fear of setting precedent that would allow weaker nations to evade the EU-wide requirements.

EU finance ministers also are considering a full exemption for inter-bank lending, a move supported by the European Central Bank.

To contact the reporters on this story: Jim Brunsden in Luxembourg at jbrunsden@bloomberg.net; Rebecca Christie in Luxembourg at rchristie4@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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