BRUSSELS (Reuters) - Euro zone finance ministers will discuss on Thursday how to decide which creditors will lose money and in what order during future bank rescues by the bloc’s bailout fund, the European Stability Mechanism.
They will consider four potential options that range from shielding depositors and senior bondholders to imposing losses on some of them.
The options are listed in a preliminary document “ESM direct recapitalisation - role of bail-in” prepared for the ministers for their discussion of guidelines on when the ESM can invest in a systemically important bank to save it from failure.
The euro zone is separately working on a law, called the bank recovery and resolution directive (BRRD), that will establish its own order in which losses are imposed on those who entrusted money to a failing financial institution.
“There is ... a clear distinction to be made between the transition period for which ad hoc rules need to be agreed on, and the steady state, in which a harmonised bail-in regime will apply subsequent to the entry into force of the BRRD’s bail-in provisions,” said the document, seen by Reuters.
“Consequently, four umbrella options emerge as a possible means of introducing a role for bail-in provisions in the draft instrument guidelines at this time,” the document said.
The first option is to use EU rules regulating when and how a government can help a bank - the so-called state aid rules - to determine who will lose out. In August, state aid rules will be updated to shield bank depositors and senior bondholders.
Under EU state aid rules only shareholders and junior bondholders would suffer losses in case of a bank restructuring.
Under the second option listed in the paper, the European Commission would decide who must contribute financially to a bank’s restructuring, although in agreement with the relevant government and taking into account an assessment by the ECB.
The third option would grant the power to decide which liabilities would be written down or converted into equity to the government of the bank’s home country and the ESM, which would jointly reach a deal on the basis of an ECB assessment.
Under option 3, “depositors shall not be bailed-in”, the document said. It did not make a distinction between depositors with less than 100,000 euros, who are insured under EU law, and those with more. Such uninsured depositors suffered big losses when Cyprus’s banking sector was restructured this year.
The fourth option appears to go the furthest in seeking contributions to a bank rescue and grants the power to determine which of the bank’s liabilities would be affected to euro zone finance ministers, who form the board of the ESM.
“The writing down or conversion of debt shall be carried out to the extent necessary to restore the institutions’ capital to the supervisory requirements as determined b the ECB in its capacity as supervisor,” the document said.
“If necessary to reach the supervisory requirement, this will include the writing-down nor conversion of unsecured senior creditors, including uninsured depositors and the national Deposit Guarantee Scheme,” the document said. (Writing by Jan Strupczewski; Editing by Catherine Evans)