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EU finance ministers seek rules to shift burden for bank failures from taxpayers to creditors

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(Globalpost/GlobalPost)

BRUSSELS - European Union governments want to shift the cost of rescuing troubled banks from taxpayers to the banks' creditors, including the holders of large deposits as a last resort.

The finance ministers from the 27-nation bloc met Tuesday in Brussels to hammer out the new rules on how to fund bank rescues as part of their wider project to set up a banking union. The union is key to their plans to strengthen the financial sector avoid a repeat of the crisis.

"This is at the moment the biggest project for Europe," said Dutch Finance Minister Jeroen Dijsselbloem. "It's absolutely important to get it right."

The bloc should move swiftly and get all elements of the banking union running by 2015, well before the initial deadline of 2018, added Dijsselbloem, who also chairs the meetings of the 17-country eurozone's finance ministers.

Tuesday's meeting focused on establishing a hierarchy of which bank creditors have to take losses — to be involved in a so-called "bail-in" — in case the bank needs rescuing. The ministers mostly agreed that banks' shareholders and capital must take the first hit. After that, the pecking order becomes less clear, with junior and senior bond holders and, ultimately, all the banks' clients on the line.

The ministers said holders of deposits of over 100,000 euros ($130,000) — the EU's deposit insurance ceiling — could be asked to suffer losses. They said, however, that depositors would only be asked to take losses as a last resort and that there could be exceptions. All deposits below 100,000 euros must and will be "sacrosanct," insisted EU Commissioner Michel Barnier, who is in charge of financial market reform.

The issue has become important since the bailout for Cyprus, agreed on in March, inflicted losses on deposits over 100,000 euros at the country's two biggest banks. An initial proposal was to have all deposits, even those covered by the 100,000 euro insurance limit, suffer losses. The proposal was quickly rejected, but raised concerns and confusion across Europe on how bank creditors would be treated in future bank rescues.

The European Central Bank and EU officials have since called for the establishment of clear rules on the matter so that investors can gauge their risk beforehand.

"That's the lesson from Cyprus: it must be clear what will happen," said German Finance Minister Wolfgang Schaeuble.

National authorities could in some cases decide to spare some creditors. But such exceptions must be kept to a minimum to keep the playing field level, he argued.

The ministers were not expected to make a final decision on the new rules Tuesday, but they sought to provide political guidance for the technical work of establishing the rules.

Dijsselbloem, Britain's George Osborne and others argued that — in addition to existing capital requirements — bigger banks should be forced to hold a certain amount of investments that can be used to pay for potential rescue operations.

The ECB said it will push hard for a swift agreement on all elements of the bloc's banking union. That includes a central authority with the power to rescue or unwind ailing banks that would accompany the ECB's new role as an overseer of the bloc's banks.

"We want to make progress on all elements of the banking union in parallel," said ECB executive board member Joerg Asmussen, adding this should be achieved "hopefully by the summer of next year."

The establishment of the banking union will get credit flowing again to some of the eurozone's troubled nations, helping to "kickstart growth and employment," he said.

Asmussen's comments were backed by most ministers, but were at odds with the stance of Germany, Europe's biggest economy. It argues that the creation of some parts of the banking union will require changes to the EU's treaties first — which is a cumbersome and time-consuming process.

The finance ministers were also seeking ways to cut down on tax evasion.

"I think that at an economic time like this, it is right that everyone makes their fair contribution," Osborne said on his way into the meeting. "This is our opportunity to do that."

Part of the effort will involve reviving a program to set up an automatic exchange of banking information between countries so that interest income on various types of savings accounts can be properly taxed.

The program requires unanimous approval from all 27 EU members. Austria and Luxembourg, two states renowned for their cultures of banking secrecy, have long held up the regulation. But increasing international pressure from the U.S. and their European peers has swayed them into reconsidering their stance.

Britain could also face pressure, as many EU officials say it is not doing enough to crack down on tax evasion in its offshore territories.

Ireland's Noonan said he expected the ministers to direct the European Commission, the EU's executive branch, to also begin negotiations on the exchange of banking information with five small countries that aren't EU members — Switzerland, Andorra, San Marino, Monaco and Lichtenstein.

Noonan presided over the meeting because Ireland currently holds the EU's six-month rotating presidency.

Ministers also reached agreement on an amended budget for 2013.

The Commission said there was a shortfall of about 11 billion euros in its 130 billion euro budget, resulting mainly from unpaid bills from last year. A majority of ministers decided to propose an amendment to the budget to cover about 7 billion euros, Noonan said.

EU Budget Commissioner Janusz Lewandowski, however, insisted that member states will have to fund the remaining 4 billion euros later this year.

Britain led the minority front opposing the amended budget altogether. Osborne said it was impossible to explain to citizens why the nation states are pushing through budget cuts and other austerity measures while the EU is getting increases.

The shortfall reflects "poor management at the European level" and the Commission should go back to the drawing board and shift funds around to find the money, he added.

The amended budget is tiny in size, but the decision is significant since the European Parliament has made it a precondition for reaching agreement on the EU's long-term 1 trillion euros budget, which covers the years 2014 through 2020.

"Let us not put at risk the European Union's reputation because of a budgetary question of principles. Nobody outside this building would understand that," Noonan said, referring to the massive Brussels building where ministers meet.

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Juergen Baetz can be reached on Twitter at http://www.twitter.com/jbaetz

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