A landmark EU agreement on a common rulebook for handling bank failures is in danger of unravelling over the fine print restricting when a state can intervene to rescue a struggling bank.
Britain is facing objections from several other member states as it scrambles to revise a political deal, reached in December, in an attempt to protect the Bank of England’s emergency role as covert lender of last resort.
The political stand-off over the bank recovery and resolution directive – a centrepiece of post-crisis financial reforms – is extremely unusual because it comes days before the European parliament is supposed to adopt the agreed text of the legislation.
While London insists it is belatedly rectifying a technical discrepancy, other diplomats suspect it is revisiting a fundamental element of the reforms, which aim to spare taxpayers from the costs of bank failure. “This is a complete mess, a nightmare and we have to decide what to do fast,” said one person involved.
At issue is what form of support a state can provide to a lender in difficulty without triggering a so-called bail-in, where losses are imposed on private investors who lent money to a bank.
The British want to clarify that central banks can extend liquidity even when relying on a specific government guarantee, without triggering haircuts on bondholders. The position is acceptable to parliament but, since Friday, has prompted several member states to raise concerns. At this late stage any revisions to the text require unanimity.
According to people involved in the talks, the Czech Republic is objecting in principle to making such substantial changes after a political agreement was reached, while Denmark is raising more substantial concerns about the specific British proposal. Copenhagen has taken a hard line against loopholes which could permit disguised governmental bailouts.
At the other end of the spectrum, multiple countries responded by calling for broader exemptions in the text. France, Italy, Sweden and Portugal specifically want assurances that state guarantees can also be extended to help a struggling bank issue bonds without requiring bail-in. This, however, is opposed by the European parliament.
Germany has yet to take a formal position and its intervention will be critical. Berlin previously pushed hard to limit the freedom states had to deploy public money to save banks. It supported the original text, which forced losses on creditors if a bank accepted state-backed liquidity support or guarantees for bonds.
Negotiators have one or two days to resolve the dispute. Sven Giegold, a German Green MEP, said: “These member states want to clear the way to use taxpayers money to rescue banks. It is against the spirit of loyal co-operation between EU institutions to attempt to change the result of a negotiation at the last minute.”
The debate is also refocusing attention on “precautionary recapitalisation” – one form of state intervention that was exempt from requiring immediate bail-in. The drafting remained unclear, however, and officials are still pressing for clarity on how it could be used and whether it would clash with EU competition rules curbing state aid.
Sharon Bowles, the chair of the parliament’s economics and finance committee, said the revisions were essential to accommodate national central banks that “do not have big balance sheets” and need extra guarantees from the state when lending to struggling lenders. By contrast she wants state guarantees for bank bonds “outlawed” as it would open a loophole that protected private investors from risk.
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