The European Commission is to impose more stringent conditions on state bailouts for troubled banks so that shareholders and junior bondholders suffer losses before taxpayers foot a rescue bill.
The imminent revision of the EU state aid controls uses the recent Spanish bank bailouts as a Europe-wide template, ensuring that all 27 member states impose some pain on creditors, even when it is politically inconvenient and those governments can afford to use public funds.
Under the commission’s new rules a higher level of “burden-sharing” will be required for shareholders and junior creditors through a mandatory “bail-in”, while bank restructuring plans will have to be agreed by Brussels before state support is issued.
So far, creditor “haircuts” have largely been forced on countries receiving EU rescue funds, raising fears in Brussels that, without common standards, bank bondholders in economically strong member states will be treated more leniently during a crisis.
EU regime
The tightening of the state aid rules comes years before the planned introduction of a formal EU regime for winding up failed banks by imposing losses on creditors.
Senior EU officials fear uneven approaches to bailouts could further drive up relative funding costs for banks in southern Europe, given creditors would see a lower risk of a “haircut” from investments in banks in AAA-rated countries.
The updated EU rule book is based on the experiences of Spain and the Netherlands. In the former, junior bondholders were hit and EU restructuring plans agreed before bailout funds were disbursed, while in the latter subordinated creditors were hit when SNS Real was nationalised.
However, it stops short of the Cyprus bank restructuring, which imposed losses on senior bondholders and uninsured depositors. The EU is negotiating a directive that could bail in senior bank creditors but it is unlikely to be enforced systematically before 2018.
The new state aid guidelines, which will be applied to future bank failures, are under the commission’s executive powers. They could be enforced from late summer.
The EU polices state bailouts in order to cut the bill for taxpayers and mitigate the market impact so that banks reliant on public money cannot undercut their rivals who have no support.
Through the financial crisis, these rules have become the effective resolution framework for Europe and will remain so until common laws are agreed and resolution funds are built up. This could take five or more years.
Since 2008, €1,600 billion of taxpayer money has been pumped into banks, and the commission has overseen the restructuring or winding-down of about 60 lenders, accounting for more than 20 per cent of all EU banking assets. – (Copyright The Financial Times Limited 2013)
