The European Union’s 27 finance ministers have reached agreement on EU-wide rules on how to rescue failing banks – forcing countries to ask the European Commission for permission if they want to use national resolution funds and ensuring that taxpayers foot the bill only as a last resort.
Despite significant differences between member states before the meeting began, finance ministers agreed a compromise in the early hours of Thursday (27 June) that set outs the order in which investors and creditors will have to take losses to prop up or wind down a stricken bank.
The rules also set out the extent to which these creditors have to be ‘bailed in’ in this way before member states can draw on other means, such as national resolution funds or the eurozone’s rescue fund, the European Stability Mechanism (ESM).
“This is a revolutionary change to the way that banks are treated across the European Union,” said Michael Noonan, the finance minister of Ireland, who was chairing his last meeting of finance ministers before the end of his country’s presidency of the Council of Ministers. He said that countries would “no longer have to make it up as they go along” when needing to rescue financial institutions.
The deal, at an extraordinary meeting of finance ministers in Brussels, will give a significant boost to national leaders, who hold a summit meeting later today.
The EU has been striving to break the link between indebted banks and indebted national economies for many months and has been determined to ensure that taxpayers are never again asked to bail out a failed bank.
Under this morning’s agreement, there would be an EU-wide model for bank rescues. Deposits below €100,000 would always be protected while other deposits from individuals and from small and medium-sized companies would only be affected after all other creditors had suffered losses.
Member states had been at odds over how much flexibility to give to member states in the bail-in process. Under this morning’s 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.
National resolution funds would have to reach a target level of at least 0.8% of covered deposits of all banks in the country within ten years. Banks will be asked to make annual contributions based on their liabilities to finance these funds.
As a concession to Sweden, which was pushing for as much flexibility as possible, countries with resolution funds of at least 3% of the total covered liabilities in the country would have the flexibility to use resolution funds after 20% of a bank’s risk-weighted assets had been bailed in.
Michel Barnier, the European commissioner for the internal market, who made the original legislative proposal and attended today’s meeting, 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. “And it’s always less expensive to do it in an organised and orderly way”. He said today’s deal represented a “balanced compromise”.
Jeroen Dijsselbloem, the finance minister of the Netherlands, said that the rules represented a shift in responsibility to pay for bank rescues “from the taxpayer to the financial sector.”
Hopes had been fading that an agreement would be reached when talks collapsed after 18 hours in the early hours of Saturday morning (22 June).
However, a deal became more likely after officials from France and Germany – which had been at odds on Saturday – met earlier on Wednesday to agree a position
On Saturday member states were at odds over how much flexibility to give national regulators to impose losses on creditors and when to allow the use of resolution funds. How to write into the legislation the new powers of the ESM to recapitalise banks directly into the legislation also became a sticking point.
France, together with a group of countries outside of the eurozone, notably Sweden, had pushed for as much flexibility as possible to decided how to bail in creditors.
Other countries, led by Germany, wanted a much more rigid model to prevent member states bailing out banks using taxpayers money.
Today’s 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. They are expected to come into effect in 2018.
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