EU to decide who pays when banks fail

The European Union will seek on Friday to forge rules to force losses on large savers when banks fail, a sensitive reform that could shape how the euro zone deals with its sickly banks.

Finance ministers in Luxembourg will try to resolve one of the most difficult questions posed by Europe’s banking crisis – how to shut failed banks without sowing panic or burdening taxpayers.

“The costs of future restructurings can’t be wished away,” said a senior EU official involved in the talks. “We need a mechanism to shift the burden away from taxpayers.”

But France and Germany are divided over how strict the new rules should be, with Paris worried that imposing losses on depositors could prompt a bank run.

A draft EU law that will form the basis of discussions recommends a pecking order in which first bank shareholders would take losses, then bondholders and finally depositors with more than 100,000 euros ($132,000) in their account.

That would make the harsh treatment of savers, which was part of Cyprus’s bailout in March, a permanent feature of Europe’s response to future banking crises. EU countries would be required to follow these rules when closing banks.

RESISTANCE IN LONDON, PARIS

A central element to ensure the euro zone’s long-term survival is a system to supervise, control and support its banks, known as banking union.

Common rules in the wider European Union are considered a stepping stone towards the euro zone’s banking union.

Agreeing EU-wide norms would address Germany’s demand that European rules on closing banks be in place before the 17-nation euro zone’s bailout fund can help banks in trouble.

Euro zone finance ministers agreed late on Thursday to set aside 60 billion euros to help banks via the fund, the European Stability Mechanism.

If agreed, the new EU rules would take effect at the start of 2015 with the provisions to impose losses coming as late as 2018.

Full article: EU to decide who pays when banks fail (Reuters)

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