Tighter EU curbs urged on winding down banks

Europe’s top official in charge of winding down failed banks has urged the EU to tighten restrictions on when governments can pump money into stricken lenders, in response to recent cases in Italy where senior bondholders were spared losses.

Elke König, the head of the eurozone’s Single Resolution Board, told the Financial Times in an interview that state aid guidelines adopted by the European Commission in 2013 were in effect out of date, as the EU has since taken steps to make sure failed banks can be wound down without sparking a broader crisis.

The guidelines, which were invoked by Italy when it provided some €17bn of state aid to smooth the liquidation of Veneto Banca and Banca Popolare di Vicenza, require shareholders and junior creditors to be wiped out before taxpayer money can be used, but spare senior bondholders.

This has prompted complaints from Berlin and some other capitals that the measures amount to a loophole allowing nervous governments to get around a principle adopted by the EU in the wake of the financial crisis. That principle holds that investors, including senior creditors, should face losses ahead of the taxpayer.

“We need to make sure that we are not putting wrong incentives into the system,” Ms König said. “It’s now time to look into this.”

Wolfgang Schäuble, Germany’s finance minister, has led calls for the guidelines to be reviewed, while Jeroen Dijsselbloem, president of the eurogroup of finance ministers, has also said that they should not offer a safe haven for banks that “attempt to avoid the tough rules”.

The frustrations with the current standards stem from the fact that they are out of sync with an EU law in force since 2016, known as the Bank Recovery and Resolution Directive (BRRD), which requires 8 per cent of an institution’s liabilities, including senior bondholders if necessary, to be wiped out before public money is tapped.

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That law applies in the cases where systemically important banks fail, meaning it was not used for the two smaller Italian banks, which were dealt with under national insolvency rules.

Banks can also evade the full force of the BRRD law if authorities decide they are fundamentally solvent and only need a “precautionary recapitalisation”, an approach the Italian authorities used in the case of Monte dei Paschi di Siena earlier this year.

The European Commission has so far resisted the calls from policymakers for an update of the standards, saying they have served Europe well during the crisis. Margrethe Vestager, the EU’s competition commissioner, said last month that she had “no concrete plans to change it”.

“I think it is very important for the financial sector and therefore for all of us to have the legal certainty,” she said.

The guidelines are the exclusive preserve of the commission, which would need to decide on any changes.

Ms König said it was reasonable that the commission did not want to immediately revisit the standards, given that they had only recently been used to underpin key state aid decisions in Italy. “I think the commission would agree that there has to come a point where it needs to be changed,” she said. “I don’t see anyone saying don’t touch it.”

There are options for how to make the system “more stringent”, she said, adding that any change should be carefully thought through to avoid the EU tying its own hands when it comes to dealing with bank failures.

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“I would be the first one to say don’t close doors in a way that if you then need the door you can’t find the keys again,” she said, adding that the rules should leave some leeway for governments to grant “liquidation aid” to their banks.

“You have it in other industries too — that if there is a bankruptcy, to avoid certain mishaps you could consider liquidity guarantees, so I would not rule that entirely out.”