Rules agreed last year by the G20 leading economies are designed to prevent the kind of taxpayer bailouts that occurred during the financial crisis. They force banks to have a certain amount of special “loss-absorbing” debt. EU-wide regulations to implement the agreement are being launched by Brussels.
But problems have arisen as Germany, France and Italy have sought to change their national rules so their banks’ senior debt, such as bonds, will count towards the new international requirements. The moves centre on making sure senior bondholders take losses ahead of depositors and other senior creditors such as counterparties on derivatives.
Germany has changed its law to make it easier to impose losses on all senior bondholders, while France has instead proposed a new class of bank debt. The Italian plan focuses on giving depositors preferential treatment ahead of bond holders.
The European Commission believes the different approaches could “impede the resolution of cross-border banks and provide uncertainty for issuers and investors alike”, according to a document obtained by the Financial Times.
Brussels also has a broader concern about possible disruptions to the debt market, as differing treatment of senior debt could spur “competitive distortions” between countries.
The commission is looking at solving the matter by setting a “common approach towards the insolvency ranking of certain banks’ creditors,” according to the document, which is set to be discussed at a meeting of national officials in Brussels on Thursday.
A German government official said Berlin welcomed the commission’s intention to act. “The discussion is at a very early stage,” the official said. “We are confident a solution will be found that is acceptable to all.” [...]
The document highlights several “negative consequences” of the German approach mooted by the financial services industry, including that it may push up bank funding costs more than the other alternatives in the medium to long term. [...]
The treatment of senior debt is also tied up with other EU wrangles over how tough the bloc should be in forcing creditors to take writedowns on crisis-hit banks.
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