* Law allows automatic compensation for investors in failed banks
* Rome raised number of recipients stretching earlier deal with EU
* Move comes ahead of EU elections, raises doubts on bail-in rules
By Francesco Guarascio
BRUSSELS, April 26 (Reuters) - European Union lawmakers called on the EU’s competition chief Margrethe Vestager to block a scheme devised by the Italian government to automatically compensate shareholders of failed banks, a move seen as breaching EU rules on bank rescues.
Italy’s eurosceptic government on Wednesday adopted a decree that would allow automatic repayments for shareholders and bondholders of half a dozen banks who lost money when the lenders were liquidated.
That pushed Vestager into a tough spot before EU elections in May in which she runs as candidate for the presidency of the next commission.
The Danish liberal politician needs to choose between giving her green light to reimbursements which are popular with most voters in Italy or defending EU bail-in rules on bank rescues and state aid regulations.
Among those who would benefit from the blanket compensation scheme are investors in two banks from the north-eastern Veneto region - a powerbase for the right-wing League coalition party.
The scheme envisages automatic state-funded compensation for investors with financial assets up to 200,000 euros ($222,800) or annual income up to 35,000 euros, who would not need to demonstrate they were victims of mis-selling.
“Any automatic compensation of shareholders of failed banks is a clear violation of the European bail-in rules,” said lawmaker Sven Giegold, who sits on the EU Parliament’s economic committee. He called on the EU Commission to intervene.
The EU executive said it needed to assess the decree before deciding. It had informally authorised an earlier version of the law that allowed automatic reimbursements for investors with assets of 100,000 euros.
Vestager has been open to allowing automatic compensations for some investors. The commissioner in charge of financial services, Valdis Dombrovskis, in a letter to a EU lawmaker seen by Reuters said reimbursements could be paid with public money if liable banks had been liquidated.
But Brussels has not yet decided on the legality of the new higher threshold which would increase the number of those who could claim automatic compensation and the costs for taxpayers.
“By lifting the thresholds, the Italian government has made quite clear that they care very little for the integrity of the bail-in regime,” said Markus Ferber, who chairs the leading centre-right group on the EU parliament’s economic committee.
EU bail-in rules, adopted after several banks were bailed out in the wake of the 2007-09 global financial crisis, increase risks for shareholders and banks’ creditors to try to ensure that taxpayers do not foot the bill to rescue failing banks.
But in Italy, the application of the bail-in regime stirred outcry as investors and savers lost money after having bought financial products that they thought were safe. (Reporting by Francesco Guarascio Editing by Keith Weir)