14 May 2014

Bloomberg: EU lawmakers push back against ECB on bank creditor loss rules

ECB Vice President Vitor Constancio said on May 12 that "it may be adequate"  to invoke exceptions to EU state-aid rules for some banks shown to have capital shortfalls in the central bank’s Comprehensive Assessment. That would allow public money to be injected without enforced losses on shareholders and junior bondholders.

"What the ECB is asking for is a new wave of banking recapitalisations by the state, which is from my perspective scandalous", Sven Giegold, a German member of the European Parliament, said by phone. Interest rates charged by investors to buy bank debt are "so low at the moment, there’s no reason why banks can’t find the money on the markets", he said.

ECB President Mario Draghi last year called on Joaquin Almunia, European commissioner in charge of antitrust policy, to avoid an "improperly strict’" interpretation of the bloc’s state-aid rules in cases of banks shown by the ECB’s asset-quality review and stress test to need more capital.

In his reply to Draghi, Almunia said regulators may "deviate" from imposing creditor losses in "exceptional circumstances", subject to case-by-case review. The law allows exceptions "where financial stability is at risk" or the amount of state aid needed is "small compared to the size of the bank’s balance sheet".

According to commission data, EU nations supplied around €592 billion in asset relief and recapitalisation support for their banks in 2008-2012. In a bid to prevent any repeat of such taxpayer rescues, the EU this year approved tougher rules on creditor losses at failing banks. That legislation, called the Bank Recovery and Resolution Directive (BRRD), will add senior unsecured debt holders to the firing line for losses starting in 2016. Until then, EU state-aid rules will apply. They normally require that shareholders and junior creditors take a hit before public support is provided.

"The ECB has two objectives, it wants to get out the state-aid rules and it wants to get out of the triggering of resolution, and neither of these are justified", Giegold said. "The market economy has to come into play and that time is now."

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