- Deciding who covers troubled banks’ losses, and how
- Hierarchy of creditors to protect critical bank functions
- Minimizing impact on taxpayers
MEPs decided in favour of clear rules on the order in which troubled banks’ creditors are liable to cover losses on Thursday.
The plan is to incorporate into EU law the international standard for “total loss absorbing capacity” (TLAC) of banks which are important for propping up the banking system. The rules require banks to set aside enough funds to absorb losses and recapitalise, with minimum impact on taxpayers.
A credible bail-in “hierarchy” of shareholders and creditors to whom losses are allocated, harmonised across the EU member states, would help to protect critical bank functions and financial stability without taxpayers chipping in, says the text.
Furthermore, a new category of debts will be added to the bank insolvency hierarchy, in order to protect senior debt and other banks’ liabilities and help to reduce risk. The new “non-preferred” class of senior debt instruments would be eligible to meet the TLAC standard for global banks. Instruments in this class can neither be derivatives, nor include any derivative component.
“Grandfathering provisions”, which provide further legal certainty, will allow existing national systems and already issued debt instruments to remain in place where they fulfil the conditions.
The rules, approved by 523 votes to 113, with 8 abstentions, are to be rapidly transposed into national laws, no later than one year after their entry into force.
Gunnar Hökmark (EPP, SE), the lead MEP, said during the debate: "We have far too low investment in the EU, which is a risk in itself, as we are lacking growth we need to ensure stability. Banks need to be stable to be able to finance and secure investment. With this legislation, we will achieve clarity for when a bank is in deep trouble. There will be no discussions, as they will know what to do. We are ensuring that the risks stay with the risk taker. That’s the main purpose. It is the purpose of the hierarchy, describing the different levels of risks. Depositors and tax payers will have the least risks".
Procedure: Co-decision (Ordinary Legislative Procedure), 1st reading agreement