The Commission wants to make sure taxpayers don’t need to rescue troubled banks again.
Author: Fiona Maxwell
EU lawmakers are about to lay down new commandments to save banks from their worst sins.
This week Brussels is finalizing wide-ranging proposals designed to prevent banks from failing — and keep taxpayers from footing the bill if they do.
It will be the biggest package of legislation to be announced since politicians in Europe and the U.S. swooped in to bail out teetering banks in the wake of the 2008-2009 global financial crisis.
On Wednesday, the European Commission will officially unveil five different sets of standards governing bank safety that should go one step further in preventing EU citizens from shelling out any cash if disaster strikes in the financial sector. The new rules are known by a parade of acronyms and jargon — CRR II, CRD V, SRMR, BRRD, and an insolvency hierarchy.
The new rules are important, but they probably won’t eliminate the risk of future banking crises entirely.
Just under a decade ago, taxpayers coughed up trillions of euros to save overly risk-taking banks considered “too big to fail,” a move policymakers felt were necessary to prevent a system-wide collapse. Politicians across the globe vowed that such unprecedented and expensive bailouts should never happen again. So they set in motion plans to put creditors and investors, rather than taxpayers, in the firing line for losses.
In the future there would be a “bail-in” by a troubled bank’s key stakeholders instead of a bailout with public money.
A bail-in means a bank’s creditors, according to a pre-defined hierarchy, will not be paid back. That allows for losses to be absorbed and the bank’s capital to be replenished. The bail-in rules were implemented in 2015, but are now being revamped to make the 13 biggest EU banks issue bonds that can be easily wiped out if they need to be rescued.
The revisions to the bail-in guidelines — the BRRD — dovetail with new capital standards — the CRR II and CRD V — that banks will have to swear by.
One EU official dubbed the new capital standards “two bibles for banks.”
Once published, the five proposals will have to go through the European Parliament and EU member countries before they can be signed into EU law. But many parts of the package are largely technical and not likely to be picked up by politicians looking for a fight. Banks are nervous about what the final shape of the package will be, though they have been lobbying to protect their interests along the way.
The one key area that could be held up given its political implication is: If a bank does fail, who should lose their money first? A number of countries have already put in place guidelines surrounding the pecking order for investors, and the Commission is likely to have a tough time getting all sides to see eye to eye.
The proposals will also likely increase the amount of capital banks have to allocate against certain exposures, as well as impose harsher controls on the extent to which banks are leveraged.
In addition, to prevent weak banks from relying on short-term funding when they need it most, banks will be forced to maintain more long-term funding against loans.
The EU’s various pieces of law are being revised to take into account recently agreed upon global principles for the world’s largest financial institutions under the aegis of the Basel Committee on Banking Supervision. They have been in the works for years but come at a time when financial regulation across the Atlantic is increasingly uncertain, following the election of Donald Trump in the U.S.
Trump has repeatedly sounded off about deregulating banks, as he says financial legislation has stifled growth and “does not work for working people.” As a candidate, he threatened to repeal Dodd-Frank — the wide-ranging U.S. legislation that was signed into law in 2010 in response to the financial crisis.
Brussels rules on bank capital have been subject to similar criticisms for being overly costly for banks and therefore burdensome on smaller business borrowers in the EU.
The point of the Commission’s new package is that the banks must be saved from themselves before they can save the economy.