EU bank proposal

{Press corner | European Commission}


Banks’ Senior Debt Holders May Face Losses Under EU Crisis Plan
2011-01-06 16:00:00.6 GMT

By Jim Brunsden
Jan. 6 (Bloomberg) – The European Union proposed that bank regulators be granted powers to write down lenders’ senior debt and veto new products, as part of a package of measures to protect taxpayers from future financial crises.
“Banks will fail in the future and must be able to do so without bringing down the whole financial system,” Michel Barnier, the EU’s financial services commissioner, said in an e- mailed statement today.
Options being considered include empowering authorities to write down or convert into equity “all senior debt deemed necessary to ensure the credit institution is returned to solvency,” the European Commission said today.
The EU is aiming to avoid a repeat of the financial crisis that followed the 2008 failure of Lehman Brothers Holdings Inc.
and resulted in European governments setting aside more than $5 trillion to support banks. The plans echo calls from the Financial Stability Board for regulators to ensure that lenders can be wound down without taxpayer support.
“Being able to convert even a small fraction of bank bonds to equity can double or even treble the capital of a troubled bank overnight,” Sony Kapoor, managing director of policy group Re-Define Europe, said in an e-mailed statement. “This can help stem panic in the financial system.”
Under today’s plan national regulators of cross-border banks would also get powers to prevent “the development or sale of new business lines or products” if it would make it harder to wind down the lender in a future crisis situation.

                     EU Governments

 The commission, the executive arm of the 27-nation EU, said it’s seeking views on its proposals until March. 3 and intends to present draft legislation on the plans in June. The measures would then need approval from governments and lawmakers in the European Parliament.
 Under the EU plan, regulators could impose debt writedowns or conversions when a “failing institution” couldn’t “be wound up under the ordinary insolvency regime” and other options, such as selling the lender, or placing assets into a so-called bad bank would be impossible or insufficient.
 Wiping out shareholders and holders of subordinated debt in some cases “will not be sufficient” to shore up failing lenders, the commission said.
 In one scenario under consideration, regulators may get the power to wipe out or convert all senior debt with possible exceptions “to ensure proper functioning of credit markets.”

These may include deposits, secured debt such as covered bonds, short-term debt, and well as trades in derivatives and certain other financial instruments, the commission said.

                      Written Down

 Another option is to force banks to issue a fixed amount of bonds with contracts stating that they could be written down or converted if certain conditions are met.
 Writedowns or conversions would apply only to debt issued after the measures become law, the commission said.
 The idea of so-called bail-ins of senior debt holders is “an incredibly complicated, difficult and ultimately very politically sensitive thing to do,” Bob Penn, a lawyer at Allen & Overy LLP in London, said in a telephone interview.

“It feels to me like an entirely unworkable option,” he said.
Authorities may also be given the power to require “changes to legal or operational structures” if they are necessary to ensure that the lender could be broken up or wound down in future, the commission said.
Other ideas in the commission proposals include that governments should set up national “resolution” funds, financed by lenders, to support banks in difficulty, and that different parts of a banking group should be able to transfer capital between themselves to prevent any part of the business failing.

Too late. But glad we have protected German / French and British savers while they were writing up the new rules.