European finance ministers on Thursday agreed to a deal that would require owners, creditors and depositors -- in that order -- to cover the expenses of bailing out or winding down failed banks. The reform marks another step towards a euro-zone banking union.
Under the so-called "bail-in" deal, states would only intervene to rescue banks after all other actors, including depositors with more than €100,000 in their accounts, had participated to an extent representing at least 8 percent of total liabilities.
The deal also would require member states to set up "ex-ante resolution funds," that would hold a sum equal to 1.3 percent of a nation's insured bank deposits. The banks themselves would be required to pay into these funds, but payouts in interventions would be cappped at 5 percent of a bank's total liabilities and would require approval from the EU in Brussels.
The ''bail-in'' deal is a major milestone in the European Union to break the vicious link between banks and sovereigns. With the new rules, the 27 EU member-states want to prevent taxpayers from getting stuck with the tab when financial institutions fail, as frequently happened during the recent global financial crisis. The rules aim to lead to more responsible behavior on the part of banks.
The member states will now have to negotiate the new rules with the European Parliament, a process that could take until the end of the year. The deal also provides member states with wide-reaching powers of intervention when financial institutions founder. For example, it would permit smaller banks to be closed in the future under standardized European regulations. The rules on bail-ins would only be applied to larger, systemically relevant banks that are in need of restructuring and are closely interlinked with other banks.
Out of fear of a devastating chain reaction, the EU member states bailed out faltering major banks in 2008 to the tune of hundreds of billions of euros. The first instance in which investors and creditors were forced to make a major contribution was this spring in the bailout of Cyprus. The new EU rules would mark a major shift in policy.
At the EU summit on Thursday and Friday, European leaders are expected to push for further steps. Next week, the European Commission is to present a draft proposal for a single resolution system for the euro zone that would better integrate national resolution funds financed by the banks. The issue has already been a source of conflict between member states.
By Guylain Gustave Moke