27 June 2013

Reuters: Europe strikes deal to push cost of bank failure on investors

The European Union agreed to force investors and wealthy savers to share the costs of future bank failures, moving closer to drawing a line under years of taxpayer-funded bailouts that have prompted public outrage.

Finance ministers from the bloc's 27 countries emerged with a blueprint to close or salvage banks in trouble. The plan stipulates that shareholders, bondholders and depositors with more than €100,000 should share the burden of saving a bank.

"For the first time, we agreed on a significant bail-in to shield taxpayers", said Dutch Finance Minister Jeroen Dijsselbloem, referring to the process in which shareholders and bondholders must bear the costs of restructuring first. The rules break a taboo in Europe that savers should never lose their deposits, although countries will have some flexibility to decide when and how to impose losses on a failing bank's creditors. "They can affect German savers just as well as they can affect any other investor in the world", German Finance Minister Wolfgang Schäuble said after the meeting. Taxpayers across much of Europe have had to pay for a series of deeply unpopular bank rescues since the financial crisis that spread across the bloc to threaten the future of the euro.

French Finance Minister Pierre Moscovici signalled that ministers also agreed to French demands that the eurozone's rescue fund, the European Stability Mechanism, can be used to help banks in the 17-nation currency area that run into trouble. "It makes the whole thing coherent", said Moscovici. "It creates a solidity for the system and a system of solidarity", he told reporters.

Unlike the United States, which moved swiftly to deal with its problem banks, Europe has been reluctant to close those whose credit is crucial to the economy and with which governments have close political ties. This should change as soon as the European Central Bank takes over the supervision of eurozone banks from late next year, completing one pillar of banking union. The ECB will run checks on banks under its watch. This new EU law on sharing losses could be used as the blueprint for closing or salvaging those banks it finds to be weak. The second leg of banking union would be the resolution authority to shutter banks or restructure them. But the pace of progress depends in large part on Germany, which is reluctant to agree to such a move ahead of elections in September.

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