EU authorities have reached agreement on bank resolution rules that will have major implications for shareholders from Jan 2016.
The new ‘bail in’ rules are part of the EU’s banking union, which aims to protect interests of taxpayers in the event of a bank failure.
The new regime means there will be a hierarchy of creditors who will get ‘bailed in’ in the event a bank experiences a capital shortfall.
Ordinary shareholders will be the first group of investors to get wiped out, followed by junior bondholders, senior bondholders, and, finally, unsecured depositors over €100,000.
“To improve a struggling bank’s recovery prospects and foster general economic stability, bail-ins would apply at least until 8% of its total assets have been lost. In most cases, this would mean shareholders and many bondholders would be wiped out,” the European Parliament said.
“Above this threshold, the resolution authority may allow the bank to access resolution fund money up to a maximum of 5% of the bank’s assets.”
“A member state could lodge a request with the commission to exempt certain creditors from bail-ins on an exceptional and case by case basis. The commission has the right to object. Moreover, such exemptions would still mean that the bank would need to find 8% of its assets to bail-in before it could hope to tap other funds.”
Analysts raised concerns that the new rules are set to be introduced shortly after the comprehensive assessment of the banks is completed. Any bank that fails this review will be required to tap private investors.
The German government wanted any potential bank recapitalisation as part of a bank resolution to remain the responsibility of national authorities. However, the commission, ECB, and Ireland, among others, wanted a common resolution fund to break the link between banks and sovereigns.
A compromise of sorts has been reached.
“For each EU member state, a fund will be established which will come to the aid of banks in order to help them recover or to wind them down. The funds would be built up through bank contributions and by 2025 should reach the level of 1% of the covered deposits of the banks in that country.”
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