EU debates who pays if banks fail

Decision seen as step in creating stability, banking union

German Finance Minister Wolfgang Schauble, left, talks with his French counterpart Pierre Moscovici during a European finance ministers meeting in Luxembourg, Friday, June 21, 2013. (AP Photo/Geert Vanden Wijngaert)
German Finance Minister Wolfgang Schauble, left, talks with his French counterpart Pierre Moscovici during a European finance ministers meeting in Luxembourg, Friday, June 21, 2013. (AP Photo/Geert Vanden Wijngaert)

LUXEMBOURG - European Union finance ministers sought an agreement Friday on how best to downsize or close banks without sowing panic or having to call on taxpayers to bail out ailing lenders.

The European Union’s 27finance chiefs met in Luxembourg to agree on the order in which investors and creditors would have to absorb losses during bank restructurings. One of the stumbling points is who would be hit hardest: Should losses be limited to banks’ shareholders and creditors, or should ordinary savers holding uninsured deposits worth more than$132,000 also be included?

Ministers said they were bracing themselves for marathon negotiations as they headed into the meeting. The European Union’s top economic official, Commissioner Olli Rehn, said that an agreement can be reached in what would be another important step to stabilize thebloc’s financial system and establish a so-called banking union.

The banking union, which will make the supervision and rescue of banks the job of European institutions rather than jeopardizing member states’ finances, is a key part of the European Union leaders’ plans to restore financial and economic stability to the region.

“We have a fair chance to concluding the work, and it will be very important to maintain the momentum on the banking union,” Rehn said.

The group must decide how much leeway member states should be granted in making decisions on winding down banks. Some countries like Britain don’t want to be bound by overly rigid European rules. Other nations warn that too much flexibility would create new imbalances between the bloc’s weaker and stronger economies and destroy the project’s aim - establishing a single set ofrules that creates certainty for investors and restores trust in the financial system.

“I think it’s necessary that we have a joint solution in Europe to ensure that the European single market won’t be further fragmented,” said Luxembourg’s Finance Minister Luc Frieden. “It’s about ensuring that people in Europe know that we have strong financial institutes, but they also have to know what happens when a bank is being wound down,” he added.

Europe has already had to deal with the problems involved in restructuring banks this year. Cyprus’ government had to seek a rescue loan after it could no longer shoulder the cost of bailing out its banks. An initial agreement with the island’s European creditors and the International Monetary Fund sparked market fears since it involved a bank restructuring that would have imposed losses even on deposits covered by Europe’s $132,000 guarantee.

The deal was rapidly overhauled, but holders of large deposits in some banks were forced to take harsh losses.

In the U.S., the Federal Deposit Insurance Corp.’s rules specify that deposits larger than $250,000 might have to take losses in case of bank failures, but Europe still lacks a joint rule.

Business, Pages 27 on 06/22/2013

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