Tuesday 16 January 2018

Regulators to get writedown powers on unsecured debt

Michel Barnier.
Michel Barnier.

Jim Brunsden and Thomas Molloy

THE European Union will seek to give regulators the power to impose writedowns on senior unsecured creditors at failing banks as part of measures to prevent taxpayers from footing the bill for saving crisis-hit lenders.

The writedown powers would apply to senior unsecured debt and derivatives, while some other claims, including secured debt, would be shielded from the losses, according to draft plans. Regulators would have the so-called bail-in powers from the start of 2018.

If the reports are true, the new rules would prevent a bank crisis from overwhelming a country in the way that the demise of Anglo Irish overwhelmed the government here or the collapse of Bankia threatens to overwhelm Spain.

Ex-Finance Minister Brian Lenihan insisted that he paid most senior unsecured creditors because the European Central Bank insisted on the move. New laws would save future Irish finance ministers from taking the same decision.

Such a move would increase the cost of banking and force banks to charge customers more because it would cost banks more to borrow.

"This is a natural process of getting taxpayers off the hook," John Vickers, the chairman of the UK's Independent Commission on Banking, said in a speech in Brussels last week. "It's not sinister that funding costs go up if it's for that reason."

EU Financial Services Commissioner Michel Barnier had delayed proposing the law, which was originally scheduled to be released in September 2011, because of market turbulence.

Any bail-in of bank debt would "be accompanied by the removal of the management responsible for the problems of the institution", according to the draft proposals, prepared by Barnier's staff at the European Commission. The bank would face restructuring "in a way that addresses the reasons for its failure".

The plans, scheduled to be published on June 6, will have to be agreed on by finance ministers from the EU's 27 member states and members of the European Parliament before they become law.

The bail-in powers must be in place across the EU by the start of 2018, the commission's draft proposal said. As well as writing down claims, national regulators would also have the power to convert them into equity, according to the draft rules.

"In order to reassure investors and market counterparties and to minimise its impact, it is necessary not to apply the bail-in tool until January 1, 2018," the commission said in the document.

Such a delay would be a mistake, said Karel Lannoo, chief executive officer of the Centre for European Policy Studies, a Brussels-based research institute. "We need a shift to this system right away," Mr Lannoo said.

Without the powers, the EU risks further fragmentation of its banking market along national lines, he said.

Irish Independent

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