New EU law to shield small savers in bank rescues

Northern Rock Picnik.jpg

A draft law that a group of European Union lawmakers voted for on Monday (20 May) would shield small depositors from losing their savings in future bank rescues, but customers with more than €100,000 in savings when a bank failed could suffer losses.

Lawmakers on the European Parliament's economics committee overwhelmingly voted that, from 2016, large depositors in the EU might suffer losses if a bank gets into serious trouble. The plan was similar to a deal in Cyprus, where wealthy depositors at two banks took hits to save the country from bankruptcy.

Under the EU proposal, a bank would dip into large deposits of over €100,000 once it had exhausted other avenues such as shareholders and bondholders. But deposits under €100,000 would be spared.

"The case in Cyprus showed how important it is to have clear procedures for making shareholders, bondholders and ultimately depositors foot the bill," a press release from the committee said after the vote.

Some countries have also mooted the idea of using banks' deposit guarantee schemes. But lawmakers voted against this because it could hurt smaller savers.

The European Parliament has joint say with the 27 countries in the EU on the law that would give regulators powers to impose losses on creditors and take other steps during a bank rescue.

EU finance ministers agreed last week that large, uninsured depositors should be subject to losses but some countries may still seek some flexibility on how they wind down their banks.

"The struggle will be how binding the bail-in and the hierarchy of liabilities is," Sven Giegold, a German Green lawmaker said after the vote.

The legislation envisions creation of national resolution funds based on bank contributions. Some lawmakers are calling for a Europe-wide resolution fund and the European Commission is due to propose such a fund in the coming months but that faces resistance from Germany.

Earlier on Monday, Bank of England Deputy Governor Paul Tucker said the EU law on bank recovery and resolution would be a milestone towards a global system and help convince markets that governments were no longer willing to rescue "too big to fail" lenders.

"This legislation is a crucial building block in the move towards EU banking union and today's vote would provide for a robust framework for dealing with ailing and failing banks across Europe. The absence of clear rules on bank recovery and resolution in many EU countries played a clear role in the chaotic response to the financial crisis and a coherent common EU rulebook is urgently needed. EU legislation can clearly deliver this and EU governments should prioritise the passage of this legislation, and not kick it to the long grass of treaty change,” the Greens economic and finance spokesperson Philippe Lamberts.

 “MEPs voted to ensure depositors are given the highest level of protection in the case of bank failure. The bail-in of any creditors should be done according to a clear hierarchy, with depositors with savings over €100,000 last in line, whilst deposits under €100,000 would be fully protected,” added Lamberts.

"This directive finally sets legal certainty in how to proceed in case of financial distress of banks, their branches and investment firms, both in and outside Europe. No Member State should ever again be unprepared," said German MEP and ALDE spokesperson Wolf Klinz.

Recalling the recent situation in Cyprus, he continued: "We have reaffirmed that no banking failure will ever justify the bail-in of small depositors. The protection of ordinary taxpayers money is a fundamental principle of our single market.”

Subscribe to our newsletters