But critics said that EU commissioner Michel Barnier is also using the new rules to establish a “banking union” and grab powers for the new EU regulator, the European Banking Authority (EBA).
The directive, which has been delayed for months for fear of spooking markets, establishes tools similar to those highlighted by UK and US regulators. A bust lender would be split into a “good” and “bad” bank, but instead of being bailed out, senior creditors will be “bailed-in” – forced to absorb losses alongside shareholders. The idea is that if bond investors won’t be rescued, they will supervise excessive risk-taking more effectively.
But controversially, the EU proposals include a requirement that banks have “a minimum percentage of their total liabilities in the shape of instruments eligible for bail-in”.
In effect, that means that banks like HSBC and Standard Chartered that are funded by deposits – usually seen as safer – could be forced to issue billions in expensive new bonds.
Economist Philip Booth at the Institute of Economic Affairs welcomed the thrust of the rules but warned: “There is a huge danger in these proposals that regulation will become more centralised, more burdensome and more bureaucratic.” The CBI said: “The rules need to be clear about who will be in charge.”
TOO BIG TO BAIL
The new rules aim to make sure that taxpayers don’t have to foot the bill when a huge bank fails. But the rules will not be in effect before 2016.
A major tool will be “bail-in bonds” – inserting a clause into all banks’ debt that means even senior creditors will lose money if the bank fails.
But in order to use the tools across borders, the measures could also give huge new powers to Brussels to step in and take over a shaky bank, restructure it and apportion the losses.