Bondholders to be automatically burned under new EU banking plans
The European Union is preparing to introduce a new class of senior bank debt designed to absorb losses when a firm fails, according to Valdis Dombrovskis, the bloc's financial-services chief.
The plan, which would make burning of bondholders in a bank crisis automatic, is part of efforts to end taxpayer bailouts by ensuring that banks can be salvaged or shuttered without recourse to public funds.
The EU is in the process of setting requirements for the liabilities banks must have to absorb losses and allow recapitalisation in a crisis. Eligible securities must be easily converted to equity or written down in resolution, a process known as bail-in.
"What we're doing is ensuring that there is an asset class that is clearly bail-inable," Dombrovskis said in an interview in Brussels. "We're clarifying or, if you want, harmonising, the creditors' hierarchy so they know where they stand."
Traditionally the hierarchy of losses when a bank ran out of money was well established, with shareholders losing first, followed by lenders to the bank and depositors. But those rules were parked during the crisis, when taxpayers in Ireland and other countries pumped cash into banks without losses falling on bondholders.
Now under EU rules, shareholders and creditors must bear losses equivalent to 8pc of a failing bank's total liabilities including own funds before rescue funds can be tapped. If necessary, that means senior creditors must also take a hit.
Countries have taken different approaches to lining up creditors for losses. Germany subordinated plain-vanilla senior unsecured debt to deposits, derivatives and structured notes to make it available to take losses.
This applies retroactively, making a pool of liabilities available in January, when the law kicks in.
Italy chose an approach similar to Germany's, but it left liabilities other than deposits on the same level as senior unsecured bonds. France created a new class of "senior non-preferred" debt.
"I wouldn't say it's this or that country's approach," said Dombrovskis, when asked about the similarity between the EU and French plans. The EU rules will apply to new bond issuance, and won't disrupt national arrangements already put in place, he said.
"This is without prejudice to solutions which are already taken," said Dombrovskis. "There's no need to step back for those countries which already made their creditors bail-inable."
Elke Koenig, the head of the euro-area bank resolution authority, has said that the German and French subordination models are both feasible.
Meanwhile, the Dublin-based units of US banking giant Citi yesterday became the first global lender to come under European Central Bank (ECB) supervision since Britain's vote to leave the European Union.
It's an option several UK banks are exploring to keep their access to the single market. Banks are looking for ways to ensure they can easily sell their services into the EU, a market of 450 million people, after Britain leaves.
One option is to shift enough assets to a eurozone country to qualify for ECB supervision. Citibank Holdings Ireland was added to a list of large banks directly supervised by the ECB yesterday, after it expanded its balance sheet through last year's merger with UK-based Citibank International. (Reuters)