08 August 2017

Financial Times: Tighter EU curbs urged on winding down banks

Europe’s top official in charge of winding down failed banks has urged the EU to tighten restrictions on when governments can pump money into stricken lenders, in response to recent cases in Italy where senior bondholders were spared losses.

Elke König, the head of the eurozone’s Single Resolution Board, said that state aid guidelines adopted by the European Commission in 2013 were in effect out of date, as the EU has since taken steps to make sure failed banks can be wound down without sparking a broader crisis.

The guidelines, which were invoked by Italy when it provided some €17bn of state aid to smooth the liquidation of Veneto Banca and Banca Popolare di Vicenza, require shareholders and junior creditors to be wiped out before taxpayer money can be used, but spare senior bondholders.

This has prompted complaints from Berlin and some other capitals that the measures amount to a loophole allowing nervous governments to get around a principle adopted by the EU in the wake of the financial crisis. That principle holds that investors, including senior creditors, should face losses ahead of the taxpayer.

“We need to make sure that we are not putting wrong incentives into the system,” Ms König said. “It’s now time to look into this.”

Wolfgang Schäuble, Germany’s finance minister, has led calls for the guidelines to be reviewed, while Jeroen Dijsselbloem, president of the eurogroup of finance ministers, has also said that they should not offer a safe haven for banks that “attempt to avoid the tough rules”.

The frustrations with the current standards stem from the fact that they are out of sync with an EU law in force since 2016, known as the Bank Recovery and Resolution Directive (BRRD), which requires 8 per cent of an institution’s liabilities, including senior bondholders if necessary, to be wiped out before public money is tapped.

That law applies in the cases where systemically important banks fail, meaning it was not used for the two smaller Italian banks, which were dealt with under national insolvency rules.

Banks can also evade the full force of the BRRD law if authorities decide they are fundamentally solvent and only need a “precautionary recapitalisation”, an approach the Italian authorities used in the case of Monte dei Paschi di Siena earlier this year.

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