EU calls time on 'too big to fail' with bank bail-in laws
Taxpayers will no longer have to foot the bill for collapsing banks as part of Brussels plans to create a banking union
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8:00PM GMT 31 Dec 2015
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Europe has called an end to the era of mass bank bail-outs as new rules to stop taxpayers from footing the cost of financial rescues come into force.
Private sector creditors will be forced to take the hit for bank failures as the EU seeks to end the age of "too big to fail", which has cost member states more than €1.5 trillion since 2008.
The measures - which will come into force on January 1 and apply to eurozone states - are designed to break the vicious cycle between lenders and governments that bought the single currency to its knees four years ago.
"We now have a system for resolving banks and of paying for resolution so that taxpayers will be protected"
Lord Hill, EU Commission
Senior bondholders and depositors over €100,000 will be in line to be "bailed-in" if a bank goes bust, a departure from the mass government-funded rescues seen in Ireland, Portugal, Spain and Greece in the wake of the financial crisis.
Brussels' tough new Bank Recovery and Resolution Directive (BRRD) will require creditors to incur losses of at least 8pc of their total liabilities before receiving official sector aid. Britain will not be subject to the rules.
The EU's commissioner for financial stability, Britain's Jonathan Hill, said: "No longer will the mistakes of banks have to be borne on shoulders of the many".
Struggling banks in Italy, Portugal and Greece have rushed to recapitalise themselves in a bid to avoid falling foul of the new regime.
Brussels has also taken six member states - including the Netherlands and Luxembourg - to the European Court of Justice for their failure toimplement the regulations into national law.
The rules resemble the bail-in of creditors first seen in the eurozone during Cyprus' banking crash in 2013, where savers were forced to endure losses as part of the international rescue package.
Protesters take part in an anti-bailout rally outside the parliament in Nicosia 2013 Photo: Reuters
More than €1.6 trillion (£1.18 trillion) has been pumped into troubled banks by member states between October 2008 and December 2012, according to figures from the European Commission. This amounts to 13pc of the bloc's total economic output (GDP) and imperiled the public finances of Ireland and Spain.
"We now have a system for resolving banks and of paying for resolution so that taxpayers will be protected from having to bail-out banks if they go bust", said Lord Hill.
A new eurozone wide insolvency fund, the Single Resolution Mechanism, will also become operational on January 1. It will build up contributions from the banking industry over the next eight years to use in cases of financial collapse.
Europe's banks have been required to beef up their capital buffers and comply with tough new regulations in the wake of the financial crisis.
The European Central Bank has also assumed direct supervisory responsibility for 129 "systemically" important lenders in a bid to create a fully-fledged banking union in the currency bloc.
"A monetary union with a half way banking union is much more stable than with no banking union at all"
Nicolas Veron, Bruegel
But analysts have warned Brussels' tentative steps towards banking union remain incomplete and could cause more uncertainty for ordinary depositors after January 1.
"Taking 8pc losses from creditors has never been tested in reality", said Nicolas Veron, of think-tank Bruegel.
"The first few test cases will be very important . There is the combination of uncertainty over how the SRM will work with ECB, and then additional uncertainty over how creditor losses will work in practice."
The problem of failing banks continues to plague a number of southern eurozone states. Portugal's new left-leaning government has already split over providing another €2.2bn taxpayer injection into struggling lender, Banif.
In Italy, many ordinary savers have been wiped out as unsecured bondholders and shareholders have taken the hit from the collapse of four small lenders in the last month. Prime minister Matteo Renzi has come under fire following the suicide of a retired man who hung himself after losing €110,000 in bonds issued by Banca Etruria.
"A monetary union with a half way banking union is much more stable than with no banking union at all", said Mr Veron.
A sign featuring an image of Italy's Prime Minister Matteo Renzi reading 'Renzopoly - at Christmas, we play together' during a protest against the collapse of four Italian banks
