Negotiators from the European Union’s 28 member states agreed on a Single Resolution Mechanism to save bankrupt banks yesterday evening (11 December), putting together a central piece of the EU’s banking union puzzle which aims at sparing taxpayers from bailing out failed banks in the future.
The Banking Recovery and Resolution Directive will make losses for senior bondholders and large savers a permanent feature of the bloc's response to banking crises, marking another milestone in the reform of an industry that triggered the 2008 financial and economic turmoil.
The agreement to accelerate the introduction of the regime by two years, to 1 January 2016, was reached between lawmakers from the European Parliament and negotiators representing EU countries.
It now goes to EU ministers for approval next week.
Michel Barnier, the EU commissioner in charge of the internal market, said it was a "big step" to ensure that "taxpayers are no longer in the front line to pay for banks' mistakes."
“Ensuring that failing banks can be wound down in a predictable and efficient way with minimum recourse to public money is fundamental to restoring confidence in Europe's financial sector,” he said.
“With these new rules in place, massive public bail-outs of banks and their consequences for taxpayers will finally be a practice of the past,” Barnier ensured.
The final trilogue talks dealt with the all-important details of who pays in the event of bank failure, explained an EU source close to the talks.
“It maintains the clear objective of a regime which, to the furthest extent possible, places the responsibility of covering bank losses on private investors in banks and the banking sector as a whole,” the source said.
Departing from that principle will only be allowed “in case of systemic crises”, the source said, meaning that taxpayer money could be involved but only when a bankruptcy threatens the stability of the wider economy.
The new directive signals a hardening of approach where senior bondholders and large savers could take a hit when a bank goes bust, following in the vein of the tough treatment earlier this year of big depositors in Cyprus. That country's bailout broke a taboo that savers should be spared when a bank is in trouble.
Some safeguards are foreseen to protect SMEs and smallholders, however. Deposits under €100,000 will be entirely exempt from any loss, and deposits of natural persons and SMEs above €100,000 will benefit from a preferential treatment ensuring that they are do not suffer any loss before all other secured creditors' claims are absorbed, the EU source explained.
Here, bank rescues will be financed primarily by privately funded resolution funds, with public funds being exposed “only in a minority of extreme and duly justified cases”.
Resolution funds financed by the banks themselves will have to be established and funded up to a level of 1% of covered deposits within 10 years.
Germany pushed for their earlier introduction of the rules so that the law would be in place in time to hit banks exposed as weak by European Central Bank tests next year.
An early start date also has the backing of the ECB, which is uneasy over banks’ reliance on its own financial support.
But many European Union countries, including struggling Portugal, are nervous that the early introduction could rattle fragile markets, reviving memories of the debt crisis and the controversial Cyprus rescue.
At a meeting of finance ministers earlier in the week, many spoke out against suggestions to accelerate.
Having such ‘bail-in’ rules in place early will mean that it may not fall solely to governments to pay for the repair of banks that the ECB finds weak after health checks late next year.
Some exceptions to the rule are, however, allowed. Sven Giegold, a lawmaker in the parliament, criticised one such clause that he said could allow a country to assist a struggling bank without first pushing losses on bondholders and other creditors.
The size of banks’ potential liabilities has long overtaken government’s ability to save them.
ECB data shows that euro zone banks have issued more than €3.8 trillion of home loans – more than a third of the bloc’s output and one-and-a-half times the German economy.
This helps explain why Germany, the euro zone’s biggest economy and the country most likely to be called on to bear the brunt of bank clean-up costs, wanted the tough rules early.
The agreement is positive for negotiations over banking union because having a scheme for sharing the costs of bank failure is essential for a new system of policing by the ECB. Germany wanted the early introduction in return for giving its full backing for the project.
In the European Parliament, the Greens/EFA political group applauded the deal because it will limit taxpayers' exposure to bank failures to an absolute minimum in the future.
"To this end, the provision that troubled banks should primarily be saved by their shareholders and creditors (bail-in) is a major breakthrough," said Philippe Lamberts, a Green MEP from Belgium who acts as the group's finance spokesperson.
However, Lamberts said the breakthrough was tempered by "contradictory provisions" on the preventative recapitalisation of banks and crisis management of cross-border institutions, "which will mean taxpayers will continue to pay for failing banks".
"If banking stress tests reveal problems with the creditworthiness or capitalisation of banks, public funds can be used to prop them up," Lamberts stressed, explaining that "shareholders and creditors will be responsible for any bank losses up to 8% of total assets."
"While any request will be subject to an a priori approval by the European Commission, this is still a setback".
At a summit in October last year, EU leaders agreed plans to complete the European banking union by January 2014, after the general elections in Germany.
The concession was made to German Chancellor Angela Merkel who argued for "quality" over "speed" in putting in place the new supervisory system, seen as a cornerstone of the EU's efforts to end the eurozone' sovereign debt crisis.
A new milestone in the EU’s efforts was reached in June when finance ministers struck an agreement on banking union that would force investors and wealthy savers to share the costs of future bank failures – or so-called ‘bail in’ – to shield taxpayers from unpopular bank bailouts.
The European Commission then tabled new proposals in July to complete the banking union with plans to establish a single euro zone authority to wind up failed banks – a move that fell foul with Germany.
- 17 Dec. 2013: EU ministers expected to sign off on the agreement
- 19-20 Dec. 2013: EU leaders gather for a summit in Brussels where they are expected to trumpet the completion of the banking union
- 1 January 2016: Single Resolution Mechanism enters into force
Council of the EU
- Press release: Council ready to conclude negotiations with the Parliament on banking sector rules (10 Dec. 2012)
- Eurozone portal: Towards a banking union