Warm welcome for banking union plans
European Union leaders reiterated that their “key priority” was to complete a banking union, and they welcomed an agreement by finance ministers in the early hours of 27 June on EU-wide rules for rescuing failing banks.
The legislation will force countries to ask the European Commission for permission if they want to use national resolution funds or taxpayers’ money to prop up or dissolve stricken institutions.
Despite significant differences between member states before the meeting of finance ministers began, 24 hours before the European Council, they agreed a compromise that set outs the order in which investors and creditors will be ‘bailed in’ (take losses). The rules also stipulate the extent to which these creditors have to be bailed in before member states can draw on other means, such as national resolution funds or the eurozone’s rescue fund, the European Stability Mechanism (ESM).
Plans for dealing with failing banks have come into sharp focus since the bail-out of Cyprus in March, which imposed losses on creditors and large depositors. Policymakers had wanted to standardise the bank-rescue process, particularly because decisions have to be taken rapidly to protect ordinary depositors and taxpayers.
The model agreed last week was described as “a revolutionary change” by Michael Noonan, the finance minister of Ireland, who chaired the meeting. He said that countries would “no longer have to make it up as they go along” when needing to rescue financial institutions.
Under the agreement, deposits below €100,000 would always be protected, while other deposits from individuals and from smaller companies would be affected only after all other creditors had suffered losses.
Role of regulators
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Member states had been at odds over how much flexibility to give to national regulators. Under the agreement, if a bank’s level of impairment is equal to or less than 8% of its balance sheet, it can only be rescued by a bail-in of creditors. Beyond that, national authorities can decide to use a resolution fund to absorb losses or recapitalise a bank, but its use would be capped at 5% of the bank’s total balance sheet. The Commission would be asked to approve this.
Michel Barnier, the European commissioner for the internal market, said that the new rules were intended to prevent further damage to the financial system. “It’s always less expensive to prevent than to repair,” he said.
The agreement on the bank recovery and resolution directive paves the way for talks to begin between the Council of Ministers and the European Parliament. They must reach a compromise before the new rules can become law. The aim is that they should come into effect in 2018.