The new system specifies the order in which banks investors and creditors, and then their uninsured depositors will face losses in case of failure of banks.
July 01, 2013 : Finance ministers from the European Union have agreed unanimously on a plan that would require shareholders and creditors to take significant losses when banks collapse. The new system specifies the order in which banks investors and creditors, and then their uninsured depositors will face losses in case of failure of banks.
Michael Noonan, the Irish Finance minister said that “This is a revolutionary change in the way banks are treated in the European Union”, the agreement for so called “bail-ins” rather than bailouts, for each failing banks represented a fresh approach to the way that the European Union addresses the kinds of crisis that have in recent times crippled countries like Cyprus and Ireland and brought down the Euro drastically.
Explaining the new rejuvenation technique for failing banks Noonan explained “Where bailout used taxpayer’s money and state assets to resolve banking difficulties, the future mandate is “bail-in”, where the assets of the banks itself will be liquefied to fill the apertures that emerge in the banking system”. Savers who have amassed more than £ 100,000 or $ 130,000 or lesser would be fully protected from such losses. The legislation would however need the approval of the European Parliament before it can become a law, said Mr. Noonan, who also chaired the meeting. He said it would be in force by 2018.
The idea comes as a boost for the European leaders, who will be meeting in Brussels on Thursday, to show the world that they have developed a mechanism to handle the financial crisis that began in mid-2007 with the near collapse of Germany’s IKB. It is a relief to leaders who have reinforced the growing sense that Europe’s economic project has become unmanageable, even as the bloc is about to expand with the admission of Croatia on Monday. It was the second time in the space of a week that ministers held a marathon late night meeting to reach a deal to avoid public money for bank failures. The deal gives countries some flexibility to choose where losses would fall, as long as bondholders and shareholders representing 8 percent of a failing bank’s total liabilities were wiped out first. The rules apparently break a taboo in Europe that savers should never lose their deposits, although countries will have some flexibility to decide when and how to impose losses on a failing bank’s creditors.
The proposed law comes into effect at a time when taxpayers across much of Europe have had to pay for a series of deeply unpopular bank rescues since the financial crisis that spread across the bloc that has threatened the common currency. The European Union has spent the equivalent of a third of its economic output on saving its banks between 2008 and 2011. The meeting of the European finance ministers was aimed at curtailing the so-called doom-loop, a scenario where governments take their countries into much deeper debt in an effort to rescue their banks and shore up their banking systems. The meeting would also reiterate efforts to set up a single banking regulator to oversee about 150 of the bloc’s largest lenders, apart from changes in banking regulation the meeting also proposed to end the unemployment in Spain and Greece where it is close to 60 percent, the leaders are also expected to spend £ 6 billion to fight youth joblessness and reduce unemployment in the next two years.