Banks' senior debt-holders may face losses under EU crisis plan
Published 07/01/2011 | 05:00
The European Union proposed that bank regulators be granted powers to write down lenders' senior debt and veto new products, as part of a package of measures to protect taxpayers from future financial crises.
"Banks will fail in the future and must be able to do so without bringing down the whole financial system," Michel Barnier, EU's financial services commissioner, said yesterday.
Options being considered include empowering authorities to write down or convert into equity "all senior debt deemed necessary to ensure the credit institution is returned to solvency," the European Commission said yesterday.
The EU is aiming to avoid a repeat of the financial crisis that followed the 2008 failure of Lehman and resulted in European governments setting aside more than €3.8trn to support banks. The plans echo calls from the Financial Stability Board for regulators to ensure that lenders can be wound down without taxpayer support.
"Being able to convert even a small fraction of bank bonds to equity can double or even treble the capital of a troubled bank overnight," Sony Kapoor, managing director of policy group Re-Define Europe, said. "This can help stem panic in the financial system."
Under the plan, national regulators of cross-border banks would also get powers to prevent "the development or sale of new business lines or products" if it would make it harder to wind down the lender in a future crisis situation.
The EU commission said it's seeking views on its proposals until March 3 and intends to present draft legislation on the plans in June.
Under the EU plan, regulators could impose debt writedowns or conversions when a "failing institution" couldn't "be wound up under the ordinary insolvency regime" and other options, such as selling the lender, or placing assets into a so-called bad bank would be impossible or insufficient.
Wiping out shareholders and holders of sub-ordinated debt in some cases "will not be sufficient" to shore up failing lenders, the commission said.
In one scenario under consideration, regulators may get the power to wipe out or convert all senior debt with possible exceptions "to ensure proper functioning of credit markets."
These may include deposits, secured debt such as covered bonds, short-term debt, and well as trades in derivatives and certain other financial instruments, the commission said. (Bloomberg)