The EU’s Bailing Wire And Bubble Gum Rescue Is Unraveling: Governments Are Saying No To The Brussels Banking Scheme

In lengthy negotiations last month the EU reached a deal on how to handle failed banks. The European parliament was set to ratify the deal in a matter of days.

Today, the UK decided it doesn’t like the deal. France, Italy, Sweden, and Portugal also decided they don’t like the deal.

The Czech Republic and Denmark don’t want changes. Nor does the European Parliament.

Please consider EU Deal on Bank Failures Risks Unravelling

A landmark EU agreement on a common rulebook for handling bank failures is in danger of unravelling over the fine print restricting when a state can intervene to rescue a struggling bank.

The political stand-off over the bank recovery and resolution directive – a centrepiece of post-crisis financial reforms – is extremely unusual because it comes days before the European parliament is supposed to adopt the agreed text of the legislation.

While London insists it is belatedly rectifying a technical discrepancy, other diplomats suspect it is revisiting a fundamental element of the reforms, which aim to spare taxpayers from the costs of bank failure. “This is a complete mess, a nightmare and we have to decide what to do fast,” said one person involved.

At issue is what form of support a state can provide to a lender in difficulty without triggering a so-called bail-in, where losses are imposed on private investors who lent money to a bank.

The British want to clarify that central banks can extend liquidity even when relying on a specific government guarantee, without triggering haircuts on bondholders.

According to people involved in the talks, the Czech Republic is objecting in principle to making such substantial changes after a political agreement was reached, while Denmark is raising more substantial concerns about the specific British proposal. Copenhagen has taken a hard line against loopholes which could permit disguised governmental bailouts.

At the other end of the spectrum, multiple countries responded by calling for broader exemptions in the text. France, Italy, Sweden and Portugal specifically want assurances that state guarantees can also be extended to help a struggling bank issue bonds without requiring bail-in. This, however, is opposed by the European parliament.

The debate is also refocusing attention on “precautionary recapitalisation” – one form of state intervention that was exempt from requiring immediate bail-in. The drafting remained unclear, however, and officials are still pressing for clarity on how it could be used and whether it would clash with EU competition rules curbing state aid.

Sharon Bowles, the chair of the parliament’s economics and finance committee, said the revisions were essential to accommodate national central banks that “do not have big balance sheets” and need extra guarantees from the state when lending to struggling lenders. By contrast she wants state guarantees for bank bonds “outlawed” as it would open a loophole that protected private investors from risk.

Save the Bondholders

What’s this all about? Saving the bondholders once again.

On December 12, the EU Reached Deal on Failed Banks

The deal was supposed to prevent further taxpayer bailouts. Taxpayers have put about €473bn into European banks since 2008.

“With these new rules in place, massive public bailouts of banks and their consequences for taxpayers will finally be a practice of the past,” said Michel Barnier, the EU commissioner responsible for the reforms.

Really? No Not Really

Under the deal, the nationalisation of a bank would be possible in exceptional circumstances, and only after 8 per cent of liabilities of a bank have been bailed-in.

While a minimum bail-in amounting to 8 per cent of total liabilities is mandatory before resolution funds can be used, countries are given more leeway to shield certain creditors from losses with approval from Brussels.

After the minimum bail-in is implemented, countries are additionally given an option to dip into resolution funds or state resources to recapitalise the bank and shield other creditors. The intervention is capped at 5 per cent of the bank’s total liabilities and is contingent on Brussels’ approval.

Gunnar Hökmark, the lead negotiator for the parliamentary side, said: “We now have a strong bail-in system which sends a clear message that bank shareholders and creditors will be the ones to bear the losses on rainy days, not taxpayers.

Battle Cry of the Day

Seems like there was a fair amount of scope for “shielding certain creditors from losses”. But now, at the last minute that is not enough for the UK, France, Italy, Sweden, and Portugal.

Germany has not yet weighed in on the changes. Chancellor Angela Merkel will not want to see the deal unravel, so I suspect she will likely to go along with the majority. Thus, it’s highly likely additional bondholder-protecting loopholes work their way into the treaty.


By the way, I find it peculiar there needs to be a deal at all.  Where is it written that bondholders can never suffer losses? Where is it written that taxpayers, not bondholders have to bail out failed banks?

Seems to me that taxpayers never should have bailed out banks, and a simple structure of losses should apply.

  1. Equity investors
  2. Junior bondholders
  3. Senior bondholders
  4. Depositors

100% of each class should be hit before the next class is hit. Should that be insufficient, then and only then should taxpayers be at risk.

Mike “Mish” Shedlock