EU races to meet end-June deadline on bank creditor-loss rules

European Union finance ministers will grapple next week over how far the bloc should standardise its approach to writing down failing banks' creditors as they seek agreement on a blueprint to end state bailouts.

While there is a "broad measure of agreement" on the draft creditor-loss rules, governments have just over a week to resolve their differences before the ministers convene in Luxembourg on June 21, according to an EU document prepared for the meeting and obtained by Bloomberg News.

Nations are divided over how much flexibility regulators should be given to exempt some creditors from writedowns, according to the document prepared by Ireland, which holds the EU's rotating presidency. Some governments contend that uniform rules are needed "to ensure legal certainty and a level playing field in the single market," while others "would prefer a larger degree of discretion," the document shows.

The EU's 27 governments are racing to meet an end-June deadline to agree on the plans, which leaders have said will be a first step toward more ambitious moves to centralise bank interventions in the 17-nation euro area.

Under draft plans presented last year by Michel Barnier, the EU's financial services chief, losses at a crisis-hit bank would be absorbed first by wiping out its capital, then writing down unsecured debt holders in order of seniority.

Standing funds
Nations would also be required to build up standing funds that would be tapped to cover restructuring costs at failed lenders. These resolution funds would be financed with levies on banks.

The plans must be approved by governments and by the European Parliament before they take effect.

Compromise texts drawn up by Ireland would hand regulators the power to exempt derivatives from writedowns, if including these would cause more harm than good.

Regulators could also, exceptionally, exempt a creditor from losses if legal or practical reasons make it impossible to impose a writedown "within a reasonable time," according to the Irish document, dated June 10. Such exemptions would be capped at five per cent of a particular class of creditors.

"Any further changes to the balance of the text towards greater flexibility is likely to be challenged by the group of member states who favor harmonisation," according to the document. This "could make agreement more difficult to achieve."

Compromise plan
Such changes would also need to be counterbalanced by toughening draft rules on the minimum amount of securities banks must issue that could be subject to a so-called bail-in, or by increasing the required size of resolution funds, according to the document.

Under the current compromise plan, national resolution funds would be required to have reserves equivalent to 0.5 percent of insured deposits in that country.

Nations are also split over whether the bail-in powers should take effect in 2015 or 2018, according to the document, which advocates a 2018 start date.