Sweeping reforms to shift the burden of rescuing failing banks from taxpayers to bondholders are to be unveiled by the European Commission, despite fears it will further rattle nervous bank investors.
When a bank is deemed to be failing, regulators will win extensive powers to write down non-guaranteed deposits and senior unsecured bondholders, according to draft proposals obtained by the Financial Times.
While the broad thrust of EU bank resolution reforms are well known, its publication has been delayed for more than a year over fears the so-called “bail-in” tools would make it even harder and more expensive for banks to raise money.
There remain extreme sensitivities over the details. The FT has seen three recent drafts that show fundamental elements of the scheme are still being rewritten, with just a few weeks before the expected publication date.
The latest version includes one big political concession. Rather than forcing banks to raise an EU minimum of debt that can be “bailed in”, national authorities will have discretion to tailor requirements.
If approved in the final version, the increased flexibility could leave a patchwork of different regimes and requirements across Europe.
However, it would placate some countries opposed to the original commission measure, which forced big banks to raise bail-in debt covering 10 percent of their liabilities. To meet this, Barclays Capital estimated listed banks would need to issue 600 billion-1 trillion euros of debt that can be bailed-in, which is more risky for investors.
Michel Barnier, who oversees EU financial services, is determined to unveil the plan in early June, within days of the Greek elections and at a time when most European banks are shut out of funding markets. He said the plans were “well thought through” and would not unsettle markets because they were “long term”.
“This is not a bad framework,” said one big European bondholder. “But it’s not going to be well received. This is a terrible time to release it.”
Experts on the reforms say the response will be unpredictable. “The commission may have decided that things are already so bad that nothing can make them worse,” said Bob Penn, a partner at Allen & Overy.
“But it is not going to help share prices or funding. It is not going to help ratings or funding costs. It will help the regulatory arbitrage business, as people duck and dive to avoid things.”
Under the plans, when a bank is judged to be failing and at the point of collapse, regulators will assume emergency powers to sack the management, restructure the bank’s assets and write down unsecured creditors.
EU members will also be required to establish resolution funds, which would be mainly bank funded and could include existing deposit guarantee schemes. National funds would, under normal circumstances, be required to lend to other country’s schemes if necessary.
Other draft changes include setting bail-in implementation for 2018, a later date than expected. Short term debt of less than a month maturity is protected, along with guaranteed deposits.
Regulators are also given some leeway in sparing derivatives counterparties should closing out positions during a debt writedown threaten financial stability or put a clearing house in danger.