EU Looks Inward On Bank Failure Regulations

As the European Union looks to streamline and clarify the rules regarding how to impose losses on bank creditors on failing banks and ensure creditors are appropriately burdened by those bank failures, some policymakers are urging the EU to look inward for a working model.

The head of the euro area’s central resolution authority, Elke Koenig, has reportedly told EU officials to take France as an example of how to unify those regulations, reports said on Friday (July 8).

The European Commission is exploring whether to establish more unified rules to issue losses for banks’ bondholders in the event of insolvency, reports explained. Policymakers are concerned that a lack of cohesion between member states could allow some financial institutions, especially cross-border banks, to avoid new bail-in tools that require creditors to participate in the aid of a failing bank but not taxpayers.

Reports said that concern over avoiding that rule has increased in the wake of the U.K. referendum vote and its impact on bank shares.

Koenig is telling the commission to look at France or Germany and their rules to ensure creditors participate in sharing the burden of losses from bank insolvency.

“Both the German and the French models for subordination are feasible,” the policymaker said; reports said Koenig is currently looking to set requirements to absorb bank losses. Reports said she is “convinced” that the minimum level for the EU’s largest, multinational banks will be set at 8 percent of total liabilities.

“We won’t decide in detail how much will have to be subordinated and how much of it must be senior,” she noted. “Here, of course, we are also closely following the discussion in the EU about the harmonization of the creditor hierarchy.”