Bank ‘bail-ins’ on EU agenda

A regime to force bank bondholders and shareholders rather than taxpayers to take losses in failing banks has been discussed by EU finance ministers.

Member states have been reluctant to discuss such a procedure, fearing it would worsen the crisis, especially in banking.

However, those involved in the sector have now accepted the need for such a bank resolution regime, according to EU sources working on the details. According to the European Commission, a bail-in tool would have been helpful in minimising the impact of the crisis on public finances.

A list of questions focusing on who should be liable to suffer losses in a bail-in was contained in a discussion paper issued by the commission to get the views of stakeholders and experts over the next four weeks.

Internal market commissioner Michel Barnier said there was international agreement that there must be an option to write down a bank’s creditors. He said he is considering having lenders issuing at least 10% of their debt in securities that would be eligible for bail-ins. Banks would also contribute to a resolution fund set up by governments but which would cover cross-border banks’ costs through close co-operation between national regulators.

Some countries, including Britain, object to a resolution fund, arguing that higher capital requirements would be a better way to cover costs from troubled lenders. A minority of countries led by France and the ECB favour an EU-wide fund

Swedish finance minister Anders Borg insists that governments must be free to use taxpayers’ money to support banks in trouble if it was considered necessary. If the conditions were right, he could also agree to bail-ins, he said.

An EU official said, “The time for bail-in has arrived is the message from this meeting. We will look closely at various models and produce a draft soon. The financial sector has come around and they too see the need for a crisis resolution”.

The commission document say the proposal will include prevention, early intervention and resolution, and give authorities powers and tools to deal with banks in difficulties.

More detailed plans will be released in June.