EU resumes battle over how to impose losses at failing banks

European Union finance ministers descended on Brussels, aiming to break a deadlock on rules for assigning losses at failing banks that doomed overnight talks last week.

Irish Finance Minister Michael Noonan, chairing his final meeting of Ireland’s six-month EU presidency today, held preliminary talks this afternoon in a bid to get a deal that he says is essential for keeping the EU’s crisis-fighting strategy on track. All 27 EU finance chiefs are scheduled to convene at about 6 p.m. in the Belgian capital.

“It’ll be slow -- bring your sleeping bag,” Noonan told reporters on June 24, after he spoke in the European Parliament. If ministers again fail to reach a deal, their timeline for strengthening central control of banks will be “off-kilter,” he said.

Talks last week foundered on the question of which creditors face writedowns when banks fail. Some countries demanded more flexibility for national authorities, while others sought strict rules across all 27 EU nations. Ministers considered several ways to set thresholds for losses that would need to be assigned via strict formulas before national discretion would be allowed.

An updated plan, circulated by Ireland to nations today, would hand regulators different degrees of flexibility depending on how they plug gaps that arise when some creditors are exempted from writedowns.

‘Liability Cascade’

“We need a clear liability cascade: first the shareholders, then the various bondholders, then the depositors -- not the insured deposits, which have always been excluded by European law -- then the member state concerned, and if that member state can’t do it, then also the European rescue fund,” German Finance Minister Wolfgang Schaeuble said on Deutschlandfunk radio today.

“What we saw in 2008, that the big ones make billions in profit and the community of taxpayers bears the losses; that’s something we no longer want to have,” Schaeuble said.

Under the revised Irish plan, regulators would have more freedom to grant carve-outs from writedowns if the burden is shifted to other private creditors, rather than to national resolution funds.

Flexibility could be applied in cases where writedowns could threaten financial stability, or cause “value destruction that would leave other creditors worse off,” according to the proposal, obtained by Bloomberg News.

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