In the future, European banks, their owners and their creditors will be held accountable should financial institutions collapse -- and not just taxpayers.
European finance ministers on Thursday agreed to a deal that would require owners, creditors and depositors -- in that order -- to cover the expenses of bailing out or winding down failed banks. The reform marks another step towards a euro-zone banking union.
"We came to political agreement," German Finance Minister Wolfgang Schäuble said early Thursday morning. He said the reforms were an "important step," noting the shareholders and creditors would be "liable first and foremost."
Under the so-called "bail-in" deal, the result of what Schäuble described as "quite difficult and intense" talks, states would only intervene to rescue banks after all other actors, including depositors with more than 100,000 in their accounts, had participated to an extent representing at least 8 percent of total liabilities. The deal also would require member states to set up "ex-ante resolution funds," that would hold a sum equal to 1.3 percent of a nation's insured bank deposits. The banks themselves would be required to pay into these funds, but payouts in interventions would be cappped at 5 percent of a bank's total liabilities and would require approval from the EU in Brussels.
Germany Says Deposits Are Safe
With the new rules, the 27 EU member-states want to prevent taxpayers from getting stuck with the tab when financial institutions fail, as frequently happened during the recent global financial crisis. Schäuble said that depositors with less than 100,000 in their accounts would have nothing to worry about and that deposit guarantees would protect them not only in Germany, but also across the EU.
Meanwhile, Dutch Finance Minister Jeroen Dijsselbloem, who is also the head of the Euro Group, said the rules would lead to more responsible behavior on the part of banks. Irish Finance Minister Michael Noonan described the deal as "a major milestone in our effort to break the vicious link between the banks and the sovereigns." "Bail-in is now the rule," he said.
The member states will now have to negotiate the new rules with the European Parliament, a process that could take until the end of the year. The deal also provides member states with wide-reaching powers of intervention when financial institutions founder. For example, it would permit smaller banks to be closed in the future under standardized European regulations. The rules on bail-ins would only be applied to larger, systemically relevant banks that are in need of restructuring and are closely interlinked with other banks.
Out of fear of a devastating chain reaction, the EU member states bailed out faltering major banks in 2008 to the tune of hundreds of billions of euros. The first instance in which investors and creditors were forced to make a major contribution was this spring in the bailout of Cyprus. The new EU rules would mark a major shift in policy.
Resistance in Berlin
Germany, the Netherlands and other countries had pushed in negotiations for a far-reaching bail-in on the part of creditors and for the most unified rules possible. France had fought for greater leeway at the national level and the ability for the state to intervene at an earlier stage in a crisis situation. French Finance Minister Pierre Moscovici said it was crucial now that the permanent euro bailout fund, the European Stability Fund, had a role in financing bank bailouts defined in the new rules.
The Brussels meeting was the second after negotiators broke off talks on Saturday after more than 20 hours without a deal. Member-states had pledged to agree to the most important building blocks for a euro-zone banking union by the end of June. They had already agreed on a centralized European banking supervisory authority for the euro zone under the jurisdiction of the European Central bank. With the deal on bank resolution, a further pillar has been erected. But at least one important element -- deposit insurance -- remains to be negotiated.
At the EU summit on Thursday and Friday, European leaders are expected to push for further steps. Next week, the European Commission is to present a draft proposal for a single resolution system for the euro zone that would better integrate national resolution funds financed by the banks. The issue has already been a source of conflict between member states. Germany, for example, is opposed to the kind of centralized European fund that might see German savings banks forced to participate in the bailout of a major French bank.