LUXEMBOURG (Reuters) - European Union finance ministers agreed on Friday on rules setting the order in which bank creditors would be hit in case of wind-downs, in a bid to accelerate the build-up of banks’ capital buffers to reduce the chances of public-funded bailouts.
Under new rules adopted after the 2010-2012 euro zone debt crisis, banks are required to issue loss-absorbing debt that would be used in a liquidation to reduce taxpayers’ costs, but that issuance has so far fallen short.
One reason for the slow take-up is the fragmentation of EU countries’ rules on the hierarchy of creditors that would be hit first in case of liquidation.
To tackle this problem, EU ministers reached an agreement on the “ranking of unsecured debt instruments in insolvency proceedings,” an EU statement said on Friday.
The deal, reached at a regular meeting of EU finance ministers in Luxembourg, defines a common EU list of subordinated creditors that would face losses when a bank needed to be rescued.
A new common category of so-called “non-preferred senior debt” is to be established. Investors who buy these bonds would be wiped out only after all shareholders and junior bondholders are hit in a bankruptcy, but before other senior creditors and depositors.
This “will provide more clarity” and help investors to assess and price the risk, the EU commission vice-president Valdis Dombrovskis told reporters.
The added clarity could also reduce claims of misselling that have partly limited regulators in the application of the new rules.
The new regime, known as bail-in, has been staunchly criticised by Italian authorities on fears that it could scare investors and damage retail savers who were unaware of risks.
The wiping out of bondholders in the rescue in 2015 of Banca Popolare dell‘Etruria, a small Italian lender, pushed a pensioner to commit suicide after he lost more than 100,000 euros (87,508.81 pounds).
Since then, Rome has tried to rescue other ailing banks using an exception to the rules that still permit the injection of public funds into banks and reduce creditors’ losses.
EU regulators expect the new rules to speed up banks’ issuance of new “bailinable” debt, boosting their financial stability.
The European Banking Authority estimated that Europe’s largest lenders need to raise issuance of these subordinated liabilities by 11 percent to meet legal requirements by 2019.
The deal reached by finance ministers needs to be approved by the European Parliament to become law. Banks have urged a quick adoption of these measures to avoid “significant market capacity concerns” if issuance was concentrated in a compressed period of time, the Association for Financial Markets in Europe (AFME), a banking lobbying group, said.
In a separate decision, EU finance ministers also agreed on Friday to delay the application of new, stricter international standards on the calculation of bank losses caused by bad loans, known as IFRS9.
The new requirements were expected to enter into force in 2018, but ministers backed a five-year transitional period in which their application will be softened.
The delay is meant to avoid steep capital falls for banks with a high percentage of bad loans, a widespread problem in southern European countries.
Reporting by Francesco Guarascio; Editing by Toby Chopra