3rd Oct 2022

Brussels wants bondholders to help pay for bank failures

  • Citizens have not been pleased with being saddled with the burden of bailing out failed banks (Photo: William Murphy)

The public would be spared from further pain in bailing out banks in the future, with bondholders instead footing more of the bill under plans unveiled on Thursday (6 January) by the European Commission to give EU national regulators more powers to intervene ahead of any crisis.

The EU executive outlined a series of ideas up for discussion that suggest bondholders should be forced to accept a 'haircut' on their investments in a troubled bank or convert their bonds into equity.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

Reacting to high-profile banking failures during the economic crisis from Belgium's Fortis, to the crash of US investment house Lehman Brothers, to Icelandic banks and Ireland's debt-engorged Anglo Irish Bank, EU member states have chosen to bail out their banking sector, with private debt being shifted wholesale over to the public sector.

Governments support for banks has amounted to 13 percent of GDP, according to commission figures.

Capitals have since used the opportunity to impose sweeping austerity measures as a way to pay for the tab, moves that have proved massively unpopular amongst citizens who complain that they are paying the price of a crisis they did not create.

"The impact on taxpayers is obvious," the EU executive said in a statement, adding that the existing arrangements covering how to deal with such crises retained "serious shortcomings."

"We must put in place a system which ensures that Europe is well prepared to deal with bank failures in an orderly manner - without taxpayers being called on again to pay the costs," said internal market commissioner Michel Barnier.

Under the proposals, which would see a so-called bail-in from investors, national authorities would be given the power to write down or convert debt into equity in the failing bank.

However, out of fear of setting off fresh panic in the markets, the commission stresses that such measures would only affect future debt, with existing bondholders spared any such pain.

"It is not envisaged that such a power would apply to existing debt that is currently in issue, as that could be disruptive," it explained.

Under the outlined proposals, national regulators would be given powers to react to brewing banking failures earlier on, including the ability to impose a replacement of management, force a bank to stop engaging in excessively risky activities, or require the bank to implement a recovery plan.

Regulators could also be able to appoint a 'special manager', a 'Mr Fix-It' parachuted in for a short period to run the firm.

The commission also hopes to see the development of a framework for EU cross-border co-ordination in the event of future banking failures. During the crisis, cross-border responses to banking disasters have been ad-hoc, the EU executive worries.

In the future, national authorities would co-ordinate their responses to ensure financial stability in all affected member states in order to achieve an outcome that best benefits the EU "as a whole".

The proposals are currently at the consultation stage, with fleshed out legislative initiatives not expected before the summer. They also focus only on banks. Similar measures focusing on insurance firms and other types of financial institutions are to be unveiled before the end of the year.

However, markets were quick to react to Brussels' call on them to pay up, with interest rates on Portuguese and Spanish government bonds jumping.

After Lisbon announced it was to attempt a sale of between €750 million and €1.24 billion in bonds next Wednesday, yield spreads between Portuguese debt and German bonds climbed to 4.14 percentage points.

Belgian rates also climbed to 4.05 percent for ten-year bonds, although analysts regard this as more of a reaction to the latest episode in the ongoing failure of the countries' Flemish and francophone parties failure to form a government.

Johan Vande Lanotte, a mediator appointed by the king resigned, declaring: "You can take a horse to water but you can't make him drink."

A government coalition has yet to form since the general election, which tool place on 13 June last year.


Investors in renewables face uncertainty due to EU profits cap

While a cap on revenues from renewables is aimed at redirecting excess profits from low-cost electricity generation back to consumers, analysts and industry groups argue such measures come with risks — and at a bad time.

News in Brief

  1. EU ministers adopt measures to tackle soaring energy bills
  2. EU takes Malta to court over golden passports
  3. EU to ban Russian products worth €7bn a year more
  4. Denmark: CIA did not warn of Nord Stream attack
  5. Drone sightings in the North Sea 'occurred over months'
  6. Gazprom threatens to cut gas deliveries to Europe via Ukraine
  7. New compromise over EU energy emergency measures
  8. 15 states push for EU-wide gas price cap

Stakeholders' Highlights

  1. The European Association for Storage of EnergyRegister for the Energy Storage Global Conference, held in Brussels on 11-13 Oct.
  2. EFBWW – EFBH – FETBBA lot more needs to be done to better protect construction workers from asbestos
  3. European Committee of the RegionsThe 20th edition of EURegionsWeek is ready to take off. Save your spot in Brussels.
  4. UNESDA - Soft Drinks EuropeCall for EU action – SMEs in the beverage industry call for fairer access to recycled material
  5. Nordic Council of MinistersNordic prime ministers: “We will deepen co-operation on defence”
  6. EFBWW – EFBH – FETBBConstruction workers can check wages and working conditions in 36 countries

Latest News

  1. Editor's weekly digest: A week of leaks
  2. Putin declares holy war on Western 'satanism'
  3. Two elections and 'Macron's club' in focus Next WEEK
  4. EU agrees windfall energy firm tax — but split on gas-price cap
  5. Ukrainian chess prodigy: 'We are not going to resign ... anywhere'
  6. Going Down Under — EU needs to finish trade deal with Australia
  7. MEPs worry Russian disinfo weakens support for Ukraine
  8. Everything you need to know about the EU gas price cap plan

Join EUobserver

Support quality EU news

Join us