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EU ministers agree ground rules on bank rescues

After a decade of talking about how to react should a bank operating in several European countries veer toward collapse, EU finance ministers on Friday agreed on some ground rules that could see governments share the cost of rescuing them.

The agreement signed on Friday by 27 EU nations is vague about how governments would work together to prevent widespread financial damage, but it does set out principles addressing when they would act, as well as clarifying priorities.

It would convene groups of national regulators for the more than 40 banks that do business across borders. These groups should plan what to do in the event of a crisis.

But officials said EU nations were still at odds on how far they needed to go to strengthen supervision and financial experts would have to continue talks to fix details.

Some nations — such as Italy — have suggested that one regulator should take the main crisis management decisions for a cross-border bank, something other supervisors strongly oppose.

“This is not a subject of consensus yet,” said Slovenian Finance Minister Andrej Bajuk, who led the talks.

Nor was there any agreement on how EU countries would split the cost of bailing out a bank with public money, he said.

European Central Bank President Jean-Claude Trichet said many national central bank governors had emphasized the danger of giving banks any kind of potential safety net paid for by taxpayers.

“The idea of sharing the burden at the international level is even considered by some as something which is far away from the present possibilities,” he said.

The text of the agreement says regulators do not aim to prevent bank failures.

“The objective of crisis management is to protect the stability of the financial system ... and to minimize potential harmful economic impacts. The management of an ailing institution will be held accountable, shareholders will not be bailed out and creditors and uninsured depositors should expect to face losses,” it said.

The agreement comes less than a year after Northern Rock stumbled toward insolvency and went to the Bank of England for help.

That led to the UK’s first bank run in more than a century.

Last month, the US Federal Reserve brokered a deal to keep the collapse at Bear Stearns from spilling over into the broader economy.

European finance ministers said government assistance would always be a last resort and there was no guarantee of help. Private sector solutions will always come first, the document said — and a government rescue “will only be considered to remedy a serious disturbance in the economy.”

European banks are increasingly making cross-border acquisitions — deals that have been strongly encouraged by EU officials who say it will boost competition and reduce costs.

Italy’s UniCredit leapt into Europe’s top 10 lenders by buying Germany’s HVB three years ago, while Spanish bank Santander, Franco-Belgian counterpart Fortis and Royal Bank of Scotland recently won a joint bid for the Netherlands’ ABN Amro.

This wave of consolidation raises the risk of a failure big enough to ripple across two or more European nations, speeding up 10 years of regulators’ discussions.

“What’s 10 years in Europe-land?” the EU’s top financial services official, Charlie McCreevy, said. “Financial turmoil has sharpened the focus. It’s now time to do something.”
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