EU weighing tougher bank-rescue rules after outrage over bailouts

Bloomberg

European Union (EU) officials are weighing a new crackdown on bank bailouts after national governments exploited loopholes in rules passed in the wake of the financial crisis.
One focus of the discussions is the so-called “precautionary recapitalisation” rule that Italy used to inject 5.4 billion euros ($6 billion) into Banca Monte dei Paschi di Siena SpA in 2017, according to an internal document written by European Commission staff and seen by Bloomberg. Officials are considering tighter limits on taxpayer funds for institutions close to collapse.
After almost 2 trillion euros of public funds were channelled to European banks in the financial crisis, the EU moved to make investors bear the costs of a failing lender. Since then, though, politicians have deployed tens of billions of euros to stave off collapses, prompting a backlash from lawmakers and public-interest groups.
Most recently, Germany agreed to a 3.6 billion-euro rescue of Norddeutsche Landesbank-Girozentrale, a lender in the country’s north that had been weighed down by toxic shipping loans. Italian politicians have also said they were ready to help Banca Carige SpA when the bank faced capital pressure last year.
The commission document focuses on the funding that EU rules allow to be given to banks that are still solvent. The law lists a range of conditions that need to be met so that the exemption isn’t abused — for example, the funds can only be used to cover future losses of a bank, not past ones.
Experience with the rule “provided some insight on elements that may need to be further clarified or adjusted,” according to the commission. Specifically, it’s seeking feedback on whether there should be a clearer definition of what is a “solvent” bank, so that aid isn’t given to a firm that’s already breaching capital requirements or likely to do so in near future.
It also says that the balance-sheet checks conducted in the context of recapitalisations may have to be revamped to better divide a bank’s past losses from future ones.
This could be a safeguard against public funds being used to cover losses that an lender has already incurred, for example through bad loans.
Sean Berrigan, a senior official at the commission, said at an event on Tuesday that the EU executive is “starting the internal reflection” on the bloc’s methodology for dealing with failing banks. “Hopefully we’ll come forward with something on that, but not in the very near term,” he told a conference in Brussels.
Any changes are likely to face intense debate with European governments and may take months or even years to agree. They could also feature as part of talks over German Finance Minister Olaf Scholz’s plan to fix the fragmentation of European banking markets.