EU Proposes Smoother Path for Winding Down Smaller Banks

Jorge Valero and Nicholas Comfort
Updated ·3 min read

(Bloomberg) -- The European Union proposed making it easier to wind down small and medium-sized banks as it seeks to regain momentum in deadlocked talks over forging closer banking ties in the region.

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The bloc’s executive arm suggested tapping national deposit protection funds to bridge gaps at banks that don’t have sufficient reserves as part of a package of proposed reforms published on Tuesday in Brussels and reported earlier by Bloomberg. The aim is to limit any hit to taxpayers or savers.

Europe came up with new rules for spreading the cost of failing banks to avoid a repeat of the taxpayer-funded bailouts that followed the 2008 financial crisis. Yet the strict bail-in framework — where non-insured depositors with more than €100,000 ($109,760) in holdings may be forced to bear some of the losses — has not worked well in practice.

That’s because smaller lenders don’t have the same capacity to bear losses as larger banks and some countries have circumvented the strict framework to protect depositors. The European Commission’s proposal would see deposit guarantee funds, which are financed by banks, step in at lenders that don’t have enough equity and bonds to wipe out.

The new rules have been years in the making, but there’s more urgency following the recent turmoil in the US when several smaller lenders collapsed and the rescue of Credit Suisse Group AG.

“We all can see how things have changed in global banking in the last few months, so now is the time to act and to look at how we can make further progress,” Paschal Donohoe, who leads the group of finance ministers from countries that share the euro, told Bloomberg during a visit to Washington, DC, last week.

Donohoe added that progress on the latest commission proposals could be a path toward achieving more ambitious goals to bolster the banking union, including by creating a common deposit guarantee scheme for the region. That has proved highly contentious as countries including Germany are worried about their savers being on the hook for losses at banks in other countries.

“Our proposal is to allow these schemes to contribute to the funding needed to transfer all deposits — insured as well as uninsured — from a failing bank to healthy bank,” Valdis Dombrovskis, the commission’s executive vice president, told reporters. “This ‘bridge mechanism’ can be a more efficient and cheaper way to deal with a bank crisis and protect depositors, instead of paying them after the bank has failed.”

Some skeptics said the EU should be cautious about providing backstops for banks whose collapse wouldn’t threaten the bloc’s financial stability.

“Some member states have institutional protection systems with a proven track record in place,” Markus Ferber, a German member of the European Parliament who serves on the economic committee, noting that the EU shouldn’t “undermine national systems that work well.”

(Updates with quotes from Dombrovskis, Ferber in final paragraphs)

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