New rules to save failed banks

Europe took a step toward banking union early on June 27, as EU finance ministers reached an agreement on how to force losses on creditors of failed banks, writes The Financial Times.

Estimating European taxpayers have extended about €1.6trn to banks badly exposed to financial crises since 2008, the daily points out the agreement moves toward “a eurozone banking union that could eventually share the costs of future bank bailouts”.

Although it still needs to be voted by the European Parliament before coming into effect in 2018, the agreement would be able to “force shareholders, bondholders and some depositors to contribute to the costs of bank failure”, while exempting individuals, small business and insured deposits of less than €100,000.

For El Periódico, the decision taken by Ecofin

is crucial for strengthening the soundness of the European banking system and for saving citizens from again having to pay for the mistakes of bankers through injections of public funds into the banks and through cuts in social spending.

The directive, the daily continues, “clearly fixes” the pecking order of contributions if a bank needs to be rescued: “first, the shareholders; second, holders of preferential shares and subordinated debentures [so-called junior creditors, less well insured]; third, bondholders; and fourth, deposits above €100,000.” A certain “flexibility” is granted to the states, which may decide to intervene directly, but in a limited way and only after getting authorisation from the European Commission:

Germany and its allies have insisted that the cost of this flexibility be financed by national funds (public or private), and that European aid backed by a state guarantee can only be requested by a country in difficulty, as in the case of Spain. Direct recapitalisation through the European rescue funds remains the last resort.