EU to shift bill for bank failures to bank clients

BRUSSELS (AP) — 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.

“I’m sure we won’t finalize it today — that would be hoping too much,” Dijsselbloem said before the meeting. “But we certainly hope to make some progress.”

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 bailed-in to pay for potential rescue operations.

The ECB, for one, left no doubt that 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,” Britain’s 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 will also try to reach agreement on an amended budget for the current year, a precursor to reaching agreement on the EU’s long-term 1 trillion euros budget, ranging from 2014 through 2020.

For 2013, the Commission says there is a shortfall of about 11 billion euros in its 130 billion budget, resulting mainly from unpaid bills from last year. The ministers were set to propose an amendment to the budget to cover about 7 billion euros. They would offer political guarantees to cover the rest.

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