UK hopes new bail-in deal ends bank bailouts

Tim Wallace
Follow Tim

BRITAIN’S banks will not have to cough up to build up a bailout fund in case of future failures under an EU deal finalised in the early hours yesterday.

Other countries have agreed to charge their banks to build up pots of cash to cover part of the cost of recapitalising broken banks. But the UK will not as a fund big enough for the largest British banks would be too vast.

It is part of an agreement on bailing in bank creditors when lenders get into trouble and need recapitalising.

The deal protects depositors with less than €100,000 or £85,000, and some pension funding.

The shortest bank to bank loans will also be protected.

Small firms and larger individual deposits come next in the hierarchy, getting some protection but not the absolute guarantee of the top deposits.

When a bank needs recapitalisation, it will begin by bailing in shareholders and junior bondholders.

When a minimum of eight per cent of the value of its liabilities has been bailed in, banks can start looking to national bail in pots, depending on regulators’ decisions.

Beyond that there is still a chance governments could get involved. However the negotiators hope any bank in need of such huge help will be able to be wound up instead.

“Authorities will have a broad range of powers to ensure any failing bank can be restructured and resolved in a way which preserves financial stability and protects taxpayers,” said European commissioner Michel Barnier.

But analysts said more work needs to be done on unifying supervision in Eurozone banks.

“Europe is well short of where it needs to be to break the bank-sovereign link,” said Raoul Ruparel from OpenEurope. “And the rules only come in in 2018 – it is not clear what happens in the case of failures in the intervening years.”


When a bank needs recapitalisation and the authorities think it can be saved, investors will have to pay up.

Shareholders are hit first. After they lose everything, junior bondholders get bailed in.

The authorities will move up the chain in reverse order of seniority.

At the very top are small retail savers, short term bank to bank loans and a few others like some pension savings.

Just below them are bigger individual depositors and small firms.

There is a chance of outside help – once the value of the bail-in reaches at least eight per cent of the bank’s liabilities, they may turn to a national bail in pot.

And after that, banks could get help from the European Stability Mechanism.

But that depends on regulators’ say so, and neither of them are available in the UK.