Europe Agrees on New Banking Rules

European Union finance ministers agreed early Thursday on a plan that would require shareholders and creditors to take significant losses when banks collapse. 

Instead of putting those losses on states, and taxpayers, the new system specifies the order in which banks’ investors and creditors, and then their uninsured depositors, will face losses. 

“This is a revolutionary change in the way banks are treated in the European Union,” Michael Noonan, the Irish finance minister, told a news conference Thursday morning after seven hours of talks. Governments “will no longer have to make it up as they go along when a bank gets into difficulty,” he said. 

The agreement to “bail in” rather than bail out failing banks represented a fresh approach to the way that the European Union addresses the kinds of crises that have in recent years crippled places like Cyprus and Ireland and threatened to sink the euro. 

“Where bailout used taxpayers’ money and state assets to resolve banking difficulties, the future mandate is ‘bail-in,’ where the assets of the bank itself will be liquefied to fill the holes that emerge in the banking system,” said Mr. Noonan, who acted as chairman of the meeting. 

The draft bill still needs the approval of the European Parliament before it can become European law, said Mr. Noonan, who added that it should be fully in force by 2018. Savers holding 100,000 euros or less would be fully protected from losses. 

The breakthrough allows leaders of the European Union’s 27 member states to endorse the deal at a summit meeting, which begins Thursday afternoon and is their last scheduled meeting before the summer hiatus. 

The deal also avoids another impasse that would have reinforced the growing sense that Europe’s economic project has become unmanageable, even as the bloc is about to expand to 28 countries with the admission of Croatia on Monday. 

It was the second time in the space of a week that ministers held a marathon, late-night meeting to reach a deal to curtail recourse to public money for bank rescues.
At the session last week in Luxembourg, ministers were divided sharply over how, and whether, to give countries discretion to protect certain classes of creditors. France, Britain and Sweden favored such flexibility. 

But Germany and the Netherlands were wary of giving governments such wide discretion, fearing that it could induce risky behavior if bankers were overly confident of relying on mechanisms like national bailout funds to come to their rescue. 

The deal reached early Thursday gives countries some flexibility to choose where losses would fall, as long as bondholders and shareholders representing 8 percent of a failing bank’s total liabilities are wiped out first. The rules also cap the amount that ailing banks can draw from special national funds. 

Germany was especially wary of endorsing new rules that could eventually mean the use of shared European funds before national elections in September.
In an apparent concession to those concerns, the ministers agreed to add an extra hurdle: as a first stage, before banks could receive direct injections from the shared fund called the European Stability Mechanism, an initial bit of aid would need to be added to governments’ balance sheets. 

Pierre Moscovici, the French finance minister, still hailed the more limited option to use the shared fund as a victory for his country. 

“It creates a solidity for the system, and a sense of solidarity,” Mr. Moscovici said Thursday. “They are not only words — they are the way Europe should function.” 

The banking effort by the ministers was aimed at curtailing the so-called doom loop, in which struggling governments take their states deeper into debt to shore up their banking systems. The initiatives under discussion could become important building blocks for the banking union, including establishing a single supervisor to oversee about 150 of the bloc’s largest lenders. 

At the meeting later Thursday, Herman Van Rompuy, the president of the European Council, who sets the agendas for meetings of the bloc’s leaders, planned to focus much of the attention on curbing high youth unemployment. Unemployment is more than 12 percent across the euro area, while youth unemployment is close to 60 percent in Spain and Greece. 

During their meeting, the leaders are expected to discuss spending 6 billion euros, or $7.9 billion, over the next two years to fight youth joblessness, instead of over a seven-year period, according to a draft copy of the leaders’ conclusions.

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