The euro zone's bailout fund, the European Stability Mechanism, could directly invest in a troubled bank next year, after 8% of the bank's total liabilities are written off, the chairman of eurozone finance ministers said on Monday (5 May).
The bloc's leaders agreed in 2012 that the ESM must have the option of directly buying a stake in a troubled bank to break the "doom loop" that binds indebted governments to the unstable banks they are trying to prop up.
Jeroen Dijsselbloem, who chairs meetings of euro zone finance ministers, said ministers agreed the ESM should be able to invest in banks next year after the option of raising money from private investors or the government failed.
"I put on the table a final proposal which was broadly supported and which will allow ministers to seek, when necessary, a parliamentary mandate in view of a political decision which we can then take before our next regular meeting of June 19," Dijsselbloem told a news conference.
"My proposal on direct recap foresees in 2015 a bail-in of 8% of total liabilities and the use of national resolution funds, up to 2015 target levels," Dijsselbloem said.
This means the direct investment of the euro zone bailout fund in a troubled eurozone bank would be a last-resort measure after all other options were exhausted.
The deal spells out the rules for just one key year, 2015, when the new EU rules of the Bank Recovery and Resolution Directive (BRRD) are not yet fully in force.
Especially the part which describes the losses that a bank's shareholders, creditors and depositors have to take before a bank can be saved with public money and enters into force only in 2016.
2015 is a crucial year, following the results of a euro zone-wide capital adequacy review and stress tests due later this year. Once the results are in, some banks may be told by regulators that they need to raise their capital.
"As announced by the ECB, the capital shortfalls will be expected to be covered within six months for those identified in the Asset Quality Review under the baseline scenario, or within nine months identified within the adverse scenario," Dijsselbloem said.
If a bank has to raise capital in 2015, it will have to ask private investors for money first. If it cannot raise enough, it can ask the government for support.
If the government cannot provide the cash, even via borrowing from the euro zone bailout fund, because the loan would make its sovereign debt unsustainable, the Dijsselbloem proposal envisages the ESM euro zone bailout fund could step in.
But to further reduce the need for eurozone funds in the transition year of 2015, a national resolution fund would first have to use the money it managed to accumulate from bank contributions during that year – the equivalent of 0.1% of all deposits up to €100,000.
Only once the national resolution fund's cash is used, and 8% of what the bank owes others is written off, can the eurozone bailout fund move in to buy shares in the bank.
Once the Bank Resolution and Recovery Directive is fully in force from the start of 2016, not only a bank's shareholders but also bondholders and even large depositors would have to lose money before government or euro one money could be used to save a bank from collapse.
EU policy-makers call this a bail-in, contrasting it with using taxpayers' money to bail out failing banks.