Framework for failing banks

Plan aims to ensure that taxpayers no longer have to foot the bill if a bank fails.

In Copenhagen, the EU’s 27 finance ministers debated a European Commission plan to create a framework for failing banks, which aims to ensure that taxpayers no longer have to foot the bill.

On Friday (30 March) the Commission published a discussion paper that underlined the need “to stop the contagion to other banks and cut the possible domino effect” when a bank collapses. “It should allow public authorities to spread unmanageable losses on banks’ shareholders and creditors,” it said. The mantra is “bail-ins rather than bail-outs”.

The paper is the prelude to a legislative proposal that the Commission hopes to publish before a meeting of leaders of the G20 group of developed and emerging economies in Los Cabos, Mexico, on 18-19 June.

Moral hazard

Michel Barnier, the European commissioner for the internal market and services, said that the plan would “reduce moral hazard prevalent in the existing banking system”.

However, there are still technical details to be worked out, not least the establishment of a ‘hierarchy’ of liabilities – in other words, which creditors should be forced to bear losses first. Officials will also examine the potential impact of these decisions on investor behaviour.

Vítor Constâncio, the European Central Bank’s vice-president, said after the meeting in Copenhagen: “Some objective criteria must be in the regulation in order for the market to put proper valuation on these bail-in-able instruments when they are issued.”

He added: “For a bail-in to be really useful, as it should be, it is essential that a trigger for supervisors to be able to use it must be clearly defined in the regulation.”

He said that the banking industry was becoming increasingly supportive of the plan.