Small depositors should be protected when a bank needs saving, demand MEPs 

Whose money should be used to prop up failing banks? ©Belga/Zumapress/A.Vafeiadakis 

Deposits under €100,000 should not be used to prop up failing banks, according to a report adopted by the economic committee on 20 May. Instead, shareholders should bear the losses, followed by bondholders and only as a last resort large depositors. The report is a reaction to a proposal by the European Commission on how to support struggling banks, which also sets out strict rules for using tax payers' money.

A bank is at risk if it owes much more money than it holds or is owed itself. Banks normally lend out money they have been given by depositors and bondholders. However, if many of the loans they provide go bad, banks are not able to pay the interest their depositors and bondholders are entitled to and will need outside help in order to survive. This is referred to as "resolving" a bank, but views differ on how the costs for this rescue operation should be shared.

The report adopted by the economic committee states that the shareholders of a bank should take the first hit, meaning that the capital they have provided through their shares should absorb all or a part of the losses. If that is not enough, then bondholders should be liable for part of the losses and then - but only as a last resort - depositors with more than €100,000 in the bank. Depositors with less than €100,000 should be exempted from bearing losses as their deposits fall under the deposit guarantee. Using small deposits was considered during the recent the Cyprus banking crisis but subsequently ruled out. 

In most cases tax payers' money will also need to be used to support struggling banks. Under the proposal, the state could issue guarantees or take an ownership stake in the failing bank, or simply take it over. Each country is also to set up its own resolution fund, financed by the banks themselves.