14 May 2013

FT: Germany backs depositor preference in bank bail-in plans

Europe moved closer to favouring big uninsured depositors over bondholders when imposing losses on a failing bank's creditors, despite UK-led warnings that the special treatment would have a "perverse effect" on bank funding.

Wolfgang Schäuble, Germany’s finance minister, gave conditional backing for a “depositor preference” compromise, so uninsured deposits are only hit as a last resort. His qualified support increases the likelihood that deposits in Europe will be made safer than bonds – a move demanded by the European Central Bank to prevent bank runs following the botched Cyprus bailout.

Reforms to bail-in bank creditors rather than tap taxpayers have been in gestation for almost four years, but finance ministers remain divided over key details, including timing and the flexibility given to national resolution authorities.  Several countries, including Britain and Denmark, are opposed to preference for deposits of more than €100,000, arguing it will raise bank funding costs and reduce incentives to buy bonds. France and Spain, meanwhile, prefer forms of exemptions for depositors.

While Mr Schäuble still prefers treating all creditors equally and still harbours reservations over the interaction of depositor preference with insolvency law, diplomats said his openness to a compromise could tip the debate.

A call by Germany, the Netherlands and the ECB to bring forward the bail-in rules from 2018 to 2015 secured only minority support. While supporters say the bail-in tools are an essential foil to the ECB as single bank supervisor, economically troubled eurozone countries fear it will spook investors. Pierre Moscovici, France’s finance minister, said: “I think there is fairly broad consensus for implementation in 2018. These are major changes and they cannot be rushed.”

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