EU nations agree rules on bank bailouts

EU nations agreed new rules for bank bailouts or “bail-ins” to save taxpayers from paying for the rescue of ailing financial institutions, an official said.

“Big step tonight,” EU Commissioner Michel Barnier wrote on Twitter. “Taxpayers (are) no longer in front line” to pay for banks’ mistakes, he added.

“Banks will have to put money aside for rainy days. We are learning lessons of crisis,” he said after the agreement was reached by representatives of the European Parliament, the European Council — the EU’s executive arm — and the 28 member states.

The aim is to make European banks stronger so that they “can lend to the real economy,” he added.

“This is a fundamental step towards the completion of the Banking Union,” Barnier said in a separate statement.

The new system will take effect from 2016, AFP reports.

The “bail-in” will primarily require important hits to be taken by shareholders and bond holders of a financial institution in trouble.

Small depositors will be explicitly excluded from incurring any costs but depositors with more than 100,000 euros ($137,000) could be affected, though lastly under a pre-defined hierarchy, the European parliament said in a statement.

For each 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.

These funds will be built up through bank contributions and by 2025 should reach the level of one percent of the covered deposits of the banks in that country.

All banks will have to contribute but those contributions will be bigger for the banks that take the bigger risks, said Barnier.

However the deal does not exclude the possibility of public money being used “in exceptional circumstances,” the parliamentary statement said.

Welcoming the deal, Gunnar Hoekmark, who steered the legislation through the European parliament, said: “We now have a strong bail-in system which sends a clear message that bank shareholders and creditors will be the ones to bear the losses on rainy days, not taxpayers.”

The deal must still be finalised on a technical level and will then need official approval by the EU member states and parliament.

The new directive will eventually dovetail with the EU’s “Banking Union”, which is currently being hammered out but will only apply to countries that use the common euro currency and others that choose to participate.

All countries now accept the principle that if banks get into difficulty, then it will not be the taxpayer but investors and creditors that bear the costs. But differences remain as to how to put that into practice.

EU ministerial talks in Brussels on Tuesday focused on a so-called Single Resolution Mechanism (SRM) that would step in to close a bank at risk before it could do too much damage to the wider economy.

The SRM would have a pot of cash at its disposal — funded eventually by the banks themselves — to cover the cost involved so the taxpayer does not have to pick up the bill.

The SRM would follow an already agreed Single Supervisory Mechanism that the European Central Bank will run to oversee the top 130 or so eurozone banks directly, and thousands more indirectly via national authorities.

While all agree in principle, the political issues are fraught since the new system would effectively hand control of national banks to the EU.

Those talks will resume at ministerial level next week with hopes for agreement by the end of the month.