EU wants to impose losses on bondholders in bust banks
THE European Commission wants to be able to "bail in" senior bondholders of failed banks and impose a levy on all lenders to fund future bank rescues, under radical plans to save taxpayers from funding future bailouts.
Proposals on bank recovery and resolution to be published today will call for a policy to impose losses on senior bondholders in bust banks from 2018 onwards, but only after shareholders, capital reserves and junior bondholders have been tapped.
The proposal from EU financial services commissioner Michel Barnier even includes a rule compelling financially secure EU member states to help less well-off countries in a crisis.
The European Central Bank prevented the Irish Government from burning senior creditors of the former Anglo Irish Bank over fears such a move would cause a Europe-wide market panic.
The banking resolution proposals have been repeatedly shelved since they were first mooted in 2010, for similar reasons.
EU officials hope that any need to "bail in" senior bondholders can be avoided by handing new powers to national regulators to intervene in private banks and investment firms before they hit the wall.
Under the plans, a "resolution" watchdog overseeing banks in each country will be able to parachute in interim managers or order banks to draw up restructuring plans if they breach EU capital adequacy rules.
Banks on the verge of collapse could be ordered to divest assets, transfer the business to a bridge bank, siphon off toxic assets to a NAMA-like bad bank or impose losses on shareholders and bondholders.
National resolution funds will be created to pay for bank clean-ups and to ensure that essential banking services -- such as cash transfers and ATM machines -- are maintained throughout the process.
Under the EU proposal, the 27 national funds, financed by banks themselves, should add up to around €100bn -- or 1pc of EU banks' covered deposits -- after 10 years.
National funds would be able to borrow from each other to cover capital injections or to set up bad banks, which officials say is a first step towards creating what the EU and ECB describe as "banking union".
However, they will not be able to use borrowed funds to repay savers, after EU governments shot down a proposal on pooling deposit guarantee schemes during talks on a separate law last year.
Today's proposals have to be approved by MEPs and finance ministers before they become law.