EU agrees euro rescue fund guidelines for banks

German Finance Minister Wolfgang Schaeuble German Finance Minister Wolfgang Schaeuble said many details were yet to be agreed upon

Eurozone finance ministers have agreed guidelines on how the eurozone's emergency bailout fund can inject money directly into struggling banks.

Enabling the 500bn euro ($660bn; £427bn) European Stability Mechanism to directly help banks is seen as a key move in stabilising the eurozone area.

The ESM will be able to inject a total of 60bn euros into troubled lenders.

But the bank's national government, and its lenders and depositors, will still have to share the burden of any rescue.

The new agreement is hoped to come into effect in late 2014. However, many details have still to be agreed.

It is also subject to a new Bank Resolution and Recovery Directive to be agreed by all of the EU finance ministers - including non-eurozone countries such as the UK - on Friday.

Vicious circle

Previously, the ESM and its predecessor were only able to bail out national governments, but not banks.

Start Quote

This "loop" is the relationship between banks and governments whereby banks that need help add to a government's budget deficit, which in turn can lead to a rescue of the whole country”

End Quote

This proved problematic in the cases of Cyprus, Spain and the Republic of Ireland, where it was the country's banks that primarily needed rescuing.

In each case, the national government had to foot the bill for rescuing its banks, leading to market fears that the losses at the banks may be more than the government could absorb.

The bailout of Spain's banks in June 2012 was financed by the ESM, but only indirectly, with the Spanish government ultimately on the hook for future losses at its banks.

The problem was compounded by the fact that most eurozone governments rely on their own banks to lend them the money they need.

The new arrangement is expected to break this vicious circle between banks and their governments.

Bail-in

Direct bank recapitalisations by the ESM are intended to spread the risk of future bank rescues across the whole eurozone.

However, eurozone governments with stronger finances and economies - led by Germany - have been seeking to limit the help provided by the ESM.

The terms now agreed by finance ministers will still leave individual national governments on the hook for much of the risk of future bank rescues.

In addition, the bank's shareholders, bondholders, lenders and even large depositors, may also have to contribute ahead of any funds from the ESM, a process known as a bail-in.

The agreed bank rescue rules

A bank's "capital" is a measure of its ability to pass on losses onto shareholders and other investors, while still being able to repay lenders and depositors.

International rules require banks to have a capital buffer - a "tier one common equity ratio" - of at least 7% of their risk-weighted assets.

Banks with a capital ratio below 4.5% would have to receive help from their own government before the ESM can step in.

Above the 4.5% threshold, 20% of the necessary capital would be provided by the national government, with the other 80% coming from the ESM.

Two years after the rescue, the national government's share could be reduced from 20% to 10%.

The new Banking Directive is expected to lay out the terms of such a bail-in, which would apply across the whole EU.

Current rules only require the bail-in of shareholders, and of junior bondholders and lenders - who have contractually accepted the risk.

But the allocation of losses to large bank depositors was controversially included in Cyprus' bailout earlier this year, raising fears that the precedent could prompt large depositors to flee troubled eurozone banks in the future, worsening any financial crisis.

"This instrument will help preserve the stability of the euro area and remove the risk of contagion of the financial sector to the sovereign, thus weakening the vicious circle between banks and sovereigns," said the chairman of eurozone finance ministers, Jeroen Dijsselbloem.

"An appropriate level of bail-in will be applied before the bank is recapitalised by the [bailout fund], in line with EU state aid rules and applying principles of the forthcoming bank recovery and resolution directive," he added.

Details

Speaking after the meeting of ministers, the German Finance Minister Wolfgang Schaeuble said: "`We have made an important step on the way to the banking union by agreeing on the main points for a future regime for direct bank recapitalisation."

However, he added that many details were yet to be agreed.

"We must avoid that there are false expectations in connection with the direct bank recapitalisation," he said.

"Those that expect any bank that needs capital can go to the [bailout fund], that's nonsense."

One important unresolved detail is whether the ESM will rank senior in any future rescue - meaning that the national government, and not the ESM, would stand as the first to lose money on the capital it injected into a troubled bank as part of any future rescue.

The Irish government has been seeking to have some of the burden of its 2010 rescue "retro-actively" transferred to the ESM.

Ireland's rescue alone totalled more than the 60bn euros allotted for future bank rescues.

Eurozone finance ministers agreed to leave the door open to such a move, but Mr Dijsselbloem said it would be decided on a case-by-case basis.

Spain's government has said it would not seek such retroactive treatment, as it wants to reassure markets that it is financially strong enough not to need outside help.

More on This Story

The BBC is not responsible for the content of external Internet sites

More Business stories

RSS

Features

  • How ebola spread graphicPatient zero

    How one boy’s death triggered Ebola outbreak


  • Passport control at airportNews quiz

    How much do you know about migration?


  • Phillip Hughes playing cricket for Australia in September 2014Brain trauma

    How is the brain injured and protected from injury?


  • Passengers pushing planeHeave!

    How many people does it take to push a plane?


  • Complainant'Like being in hell'

    The story of one victim of paedophile care home boss


BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.