May 22, 2013 4:24 pm

Brussels to tighten rules on bank bailouts

By Alex Barker in Brussels

Brussels is to impose more stringent conditions on state bailouts for troubled banks, so that shareholders and junior bondholders suffer losses before taxpayers are asked to foot a rescue bill.

The imminent revision of the EU state aid controls uses the recent Spanish bank bailouts as a Europe-wide template, ensuring that all 27 member states impose a minimum of pain on creditors, even when it is politically inconvenient and those governments can afford to use public funds.

Under the European Commission’s new rules a higher level of “burden sharing” will be required for shareholders and junior creditors through a mandatory “bail-in”. Bank restructuring plans will also have to be agreed by Brussels before state support is issued.

So far, creditor “haircuts” have largely been forced on countries receiving EU rescue funds, raising fears in Brussels that without common standards bank bondholders in economically strong member states will be treated more leniently.

The tightening of the state aid rules will come years before the planned introduction of a formal EU regime for winding up failed banks by imposing losses on creditors.

Senior EU officials fear uneven approaches to bailouts could further drive up relative funding costs for banks in southern Europe, given creditors would see a lower risk of a “haircut” from investments in banks in AAA countries such as Germany or Finland.

This updated EU rule book is based on the experience in Spain – where junior bondholders were hit and EU restructuring plans were agreed before the disbursement of bailout funds – and the Netherlands, which hit subordinated creditors in the nationalisation of SNS Real.

However, it stops short of the Cyprus bank restructuring, which imposed losses on senior bondholders and uninsured depositors. The EU is presently negotiating a directive that could bail-in senior bank creditors but these rules are unlikely to be enforced systematically before 2018.

The new state aid guidelines, which will be applied to future bank failures, are under the commission’s executive powers and those involved in the reforms say they could be enforced from the late summer. Senior officials from EU member states are due to be consulted on the plan on Thursday.

Brussels polices state bailouts with the aim of reducing the bill for taxpayers and mitigating the market impact, so that banks reliant on public money cannot undercut their rivals who have no support.

Through the financial crisis, these rules have become the effective resolution framework for Europe and will remain so until common laws are agreed and resolution funds are built-up, which could take five or more years.

Since 2008, EU states have pledged a total of around €4,900bn in state support to banks, covering almost 40 per cent of the bloc’s economic output. So far €1,600bn has been used: state money is propping up 19 of Europe’s top 76 financial institutions and up to 15 per cent of the EU financial sector is under the commission’s state aid framework, according to an International Monetary Fund study.

Provisions in the rules permit state support to be urgently dispersed in an emergency, with provisional authorisation from the commission.

However some banks restructuring plans have taken several years to then negotiate. The new rules aim to make pre-approval the norm, as was the case in Spain.

Joaquín Almunia, the EU commissioner who enforces the state aid rules, has spoken about the revision of the rules as an important opportunity to learn from best practice. He has said the transition to banking union and common bail-in rules “will be characterised by continued exposure of the taxpayers to the cost of banks’ failures and by the need to maintain a level playing field in the internal market”.

“For these reasons, the role of state aid control during this transition period will remain very important as a proven instrument to protect financial stability, the internal market, and taxpayers’ interests,” he said.