European finance ministers yesterday agreed a deal on new rules to shift the burden for future bank rescues from taxpayers to the financial sector in a bid to quell public anger over massive bailouts in recent years.
The measures, which still have to be adopted by the European Parliament, will force bank owners and bond holders firstly and then depositors with more than 100,000 euros (US$130,000) to bear the losses.
“Our aim is to have a common approach throughout Europe so our taxpayers no longer have to shoulder the burden,” said Irish Finance Minister Michael Noonan, who chaired the talks as current holder of the EU presidency.
Noonan said governments would no longer have to save banks that were “too big to fail” as the deal would end the “vicious link” that forced countries to step in and rescue lenders in order to prevent wholesale collapse.
The agreement on a key stumbling block for European integration came just ahead of the start of a summit of EU leaders that will aim to tackle another aspect of the crisis fallout — the sharp rise in youth unemployment.
The crux of the issue was who should foot the bill when a bank fails, and what room for maneuver governments can have to decide on a rescue strategy after the widely differing experiences seen in Europe in recent years.
Under the proposed rules, public funds to rescue banks would only be allowed exceptionally after a minimum level of losses equal to 8 percent of the total liabilities.
“This establishes ‘bail-ins’ as the new rule,” Noonan said, referring to a term for forced losses put on the bank instead of “bailouts” which use public funds.
The Irish presidency said it hoped the new rules would be finalized by early next year at the latest and the plan is that they would then come into effect from 2018.
“This is very important for financial stability in the EU,” French Finance Minister Pierre Moscovici told reporters as he came out of the talks.
Up to now, the taxpayer has paid for most of the state and bank bailouts — a massive sum put at 4.5 trillion euros for the period from 2008 to 2011, which has stoked growing popular disquiet and added to debt levels.
The resolution mechanism is a key step toward a “banking union,” the new overall EU regulatory framework meant to restore the banking sector to health and so prevent any repeat of the bloc’s debt crisis.
However, further steps towards banking union and greater integration between eurozone members are not expected any time soon as most analysts are expecting a pause for Germany’s general election in September.
An EU diplomat speaking on condition of anonymity said that the easing of the eurozone debt crisis meant there was no longer the same sense of urgency for reforms.
“The project seems to be moving forward, but much slower. There is a realization that they have to go ahead with integration, but it’s not happening at breakneck speed,” the diplomat said.