EU ministers in fresh push for bank failure rules

EU finance chiefs make fresh attempt to shield taxpayers from the cost of bank failures

Associated Press
EU agrees on bank-failure rules to avoid bailouts
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German Finance Minister Wolfgang Schaeuble speaks at a press conference about the German budget in Berlin, Germany, Wednesday, June 26, 2013. The government of Europe biggest economy finalized the budget for 2013 and the budget plan for 2014. (AP Photo/Markus Schreiber)

BRUSSELS (AP) -- European Union finance ministers made a fresh attempt to set up rules on who will pay for bank bailouts without letting taxpayers foot the bill, squarely putting the onus on the financial institutions' shareholders and creditors instead.

Such a deal would be an important step forward in establishing Europe's so-called banking union with the aim of restoring financial and economic stability to the recession-hit bloc. The EU's 27 finance ministers, however, still had not struck a deal early Thursday after six hours of negotiations in Brussels.

The rules under discussion seek to determine the order in which investors and creditors would have to pay to bail out a bank. Following the 2008-2009 financial crisis, countries like Ireland, Britain and Germany each had to pump dozens of billions of fresh capital into ailing banks to avoid the financial system from collapsing.

To avoid that happening again, finance ministers are discussing who should contribute in which order and how much to a bank's rescue — a so-called bail-in — so that ordinary taxpayers aren't left with the bill.

"It will be a long night," warned Irish Finance Minister Michael Noonan as he headed into the meeting in Brussels.

The ministers failed to reach a deal in 19 hours of continuous talks last week, but they seemed to make good progress at last.

"A compromise is within reach," French Finance Minister Pierre Moscovici said on Twitter.

A diplomat from another EU country said ministers were discussing a new draft that had wide backing since EU heavyweights France and Germany finally found a joint position. He declined to be named because he was not allowed to discuss the closed-door talks publicly.

The ministers' last-minute talks came only a day before a summit of the EU's 27 heads of state and government that is expected to take stock of the progress of the bloc's financial and economic policies.

A year ago, EU leaders pledged to tackle the eurozone's financial crisis by introducing a banking union, which aims to give the supervision and rescue of banks to European institutions rather than leaving weaker member states to fend for themselves.

The rules under discussion will call for banks' creditors and shareholders to be the first to take losses. But if that isn't enough to prop up the lender, small companies and ordinary savers holding uninsured deposits worth more than 100,000 euros ($132,000) will also take a hit.

To minimize the risk for both taxpayers and ordinary deposit holders, the new rules would also establish a minimum level of funds — be it capital, bonds, or deposits — that banks must have on their books to ensure that there's always enough privately held assets on which losses can be forced. Once those losses reach a level of about 8 percent of a bank's total balance sheet, then the government could top it up with a bailout worth another 5 percent of the balance sheet, according to diplomats. Details of the bailout component, however, remained still subject to intense controversy.

Last week, the ministers fought bitterly over the complex set of regulations, with two fundamental issues proving highly divisive.

The first argument is whether the same rules should apply for the 17 EU countries sharing the euro currency and the 10 members like Britain who have their own currency. The second dispute is over how much discretion should be granted to countries when it comes to restructuring or shutting down banks.

Some nations don't want to be bound by rigid European rules. Others warned that too much flexibility would create new imbalances between the bloc's weaker and stronger economies and a lack of common rules would destroy certainty for investors and erode trust in the financial system.

In the future, eurozone nations will be able to use the bloc's 500 billion euro permanent bailout fund as a last resort to shore up their ailing banks. The non-euro countries, however, won't have access to the funds and therefore ask for rules that give them more flexibility to design their own responses to bank failures.

Minister Anders Borg of Sweden, which does not use the euro, said countries with stronger banks should be allowed more discretion in how they handle possible bank failures.

"If we have a solution that is rigid, if you put on a straitjacket to solve the crisis, you will end up with a big mess," he said.

Europe has already had to deal with problems involved in restructuring banks this year. Cyprus had to seek a rescue loan after it could no longer shoulder the cost of bailing out its banks.

An initial agreement with the island's European creditors and the International Monetary Fund sparked market fears since it exposed small savers with deposits under the 100,000 euro guarantee to losses.

The deal was rapidly overhauled, but holders of large deposits in some banks were forced to take harsh losses.

In the U.S., the Federal Deposit Insurance Corp.'s rules specify that deposits larger than $250,000 might have to take losses in case of bank failures, but Europe still lacks a common rule.

The EU's new rules will foresee the establishment of national bank restructuring funds, which will eventually be merged into a European resolution authority, one of the banking union's three pillars.

Once the ministers finalize the legislation, they will then start negotiating the legislation with the European Parliament.

Another part of the banking union will be centralized oversight of big banks anchored at the European Central Bank due to be operational next year. But the discussion on the third section, a jointly guaranteed deposit insurance, is only in its early stages.

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AP writer Geir Moulson in Berlin contributed reporting.

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Follow Juergen Baetz on Twitter at http://www.twitter.com/jbaetz

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