Major changes to EU rules on state aid to banks

Europe has today overhauled the rules covering state aid to struggling banks, in a major policy shift that will put the burden on shareholders and junior debtholders when it comes to restructuring an unstable institution.

From August 1st, any bank in the European Union that needs help from the state will first have to present a detailed restructuring plan that ensures its viability before any aid can be disbursed. Currently, aid comes before a restructuring plan.

The burden on financing the overhaul of an institution will fall first on its shareholders and junior bondholders before any taxpayer money can be used.

"Today's changes of the crisis rules are based on the good practices of the last years in dealing with bank bailouts and restructuring," said Joaquin Almunia, the European commissioner in charge of competition policy.

“In particular, bank owners and junior creditors will need to contribute before any more taxpayers’ money is spent on bank bailouts,” he said.

The rule changes are an attempt by the European Commission to level the playing field among banks located in different member states and reduce fragmentation in the banking sector.

Currently, a troubled bank in one country might receive strong support from the state, protecting shareholders and creditors, while another in a separate country might get marginal assistance. The changes mean that, in theory, all banks will be treated equally and taxpayers will be better protected.

“This will lead to swifter and more efficient restructuring,” Mr Almunia said.

The changes to the state-aid rules are separate from on-going discussions about banking union, including new rules for winding up troubled banks across the euro zone and wider EU, although the two regimes are related.

Earlier this year, after the euro zone provided a bailout to Cyprus, including a fundamental restructuring of its banks, EU officials were at pains to say the rescue was a one-off and did not set a precedent or model for the future.

However, it has become clear that what happened in Cyprus will likely end up occurring in other countries if the problems in a particular bank are so bad that shareholders and junior bondholders need to be wiped out in order to recapitalise it.

Under the new state-aid rules, the commission said there would now be strict limits on executive pay at any bank receiving assistance. It is the third time the Commission has revised the state-aid rules since introducing the banking assistance framework after the collapse of Lehman Brothers bank in 2008.

The Commission said the overriding aim of the revisions was to make the rules more consistent across all 28 EU member states and ensure taxpayers were not left on the hook for problems created by bad decision-making in banks.

Reuters