EU Finance Minsters come to an agreement on common rules of future bank rescues, which shift the burden from taxpayers to the lenders. The new mechanism is considered a key step toward a ‘banking union’
European finance ministers have agreed a deal on new rules to shift the burden for future bank rescues from taxpayers to the financial sector in a bid to quell public anger over massive bailouts in recent years.
The measures, which still have to be adopted by the European Parliament, will force bank owners and bond holders firstly and then depositors with more than 100,000 euros ($130,000) to bear the losses. “Our aim is to have a common approach throughout Europe so our taxpayers no longer have to shoulder the burden,” said Irish Finance Minister Michael Noonan, who chaired the talks as current holder of the EU presidency.
Noonan said governments would no longer have to save banks that were “too big to fail” as the deal would end the “vicious link” that forced countries to step in and rescue lenders in order to prevent wholesale collapse. The agreement on a key stumbling block for European integration came just ahead of the start of a summit of EU leaders that will aim to tackle another aspect of the crisis fallout — the sharp rise in youth unemployment. The crux of the issue was who should foot the bill when a bank fails, and what room for manoeuvre governments can have to decide on a rescue strategy after the widely differing experiences seen in Europe in recent years.
Under the proposed rules, public funds to rescue banks would only be allowed exceptionally after a minimum level of losses equal to eight percent of the total liabilities.
Bail-ins as new rule
“This establishes ‘bail-ins’ as the new rule,” Noonan said, referring to a term for forced losses put on the bank instead of “bailouts” which use public funds. The Irish presidency said it hoped the new rules would be finalized by early next year at the latest and the plan is that they would then come into effect from 2018.
Dutch Finance Minister Jeroen Dijsselbloem, who is also head of the Eurogroup, said: “If a bank gets in trouble we will now throughout Europe have one set of rules on who pays the bill.” “The financial sector itself will now to a very, very large extent become responsible for dealing with its own problems,” he said.
The resolution mechanism is a key step toward a “banking union”, the new overall European Union regulatory framework meant to restore the banking sector to health and so prevent any repeat of the bloc’s debt crisis.
Up to now, the taxpayer has paid for most of the state and bank bailouts — a massive sum put at 4.5 trillion euros for the 2008-11 period which has stoked growing popular disquiet and added to debt levels. To address this problem, the EU, the European Central Bank and the International Monetary Fund in March agreed a Greek Cyprus rescue which ‘bailed-in’ larger depositors in its two biggest banks to pay for their restructuring.