Unsecured creditors face losses in failing banks plan

Brussels: The European Union will seek to give regulators the power to impose writedowns on senior unsecured creditors at failing banks as part of measures to prevent taxpayers from footing the bill for saving crisis-hit lenders.

The writedown powers would apply to senior unsecured debt and derivatives, while some other claims, including secured debt and deposits that are protected by government guarantee programmes, would be shielded from the losses, according to draft plans obtained by Bloomberg. Regulators would have the so-called bail-in powers from the start of 2018.

The cost of bank funding may increase as investors take on board the plans "but this is a natural process of getting taxpayers off the hook," John Vickers, the chairman of the UK's Independent Commission on Banking, said in a speech in Brussels yesterday. "It's not sinister that funding costs go up if it's for that reason."

EU Financial Services Commissioner Michel Barnier had delayed proposing the law, which was originally scheduled to be released in September 2011, because of market turbulence. Any bail-in of bank debt would "be accompanied by the removal of the management responsible for the problems of the institution," according to the draft proposals, prepared by Barnier's staff at the European Commission. The bank would face restructuring "in a way that addresses the reasons for its failure."

Barnier has cited the state-funded break up of Fortis AG along national lines as an example of the kinds of bank rescues that should be avoided in the future, both to protect taxpayers and to preserve the principle of cross-border banking in the bloc.

Stefaan De Rynck, Barnier's spokesman, declined to immediately comment on the document.

Barnier said yesterday that national regulators would be left with some flexibility to decide when they enact a bail-in.

Agreement vital

The plans, scheduled to be published on June 6, will have to be agreed on by finance ministers from the EU's 27 member states and members of the European Parliament before they become law.

The bail-in powers must be in place across the EU by the start of 2018, the commission's draft proposal said. As well as writing down claims, national regulators would also have the power to convert them into equity, according to the draft rules.

"In order to reassure investors and market counterparties and to minimise its impact it is necessary not to apply the bail-in tool until January 1, 2018," the commission said in the document.

Such a delay would be a mistake, Karel Lannoo, chief executive officer of the Centre for European Policy Studies, a Brussels-based research institute, said in a phone interview.

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