The European Union suggested on April 18 making it more difficult for states to invest billions of euros into failing banks, as Italy did with Monte dei Paschi di Siena six years ago.
Suggestions from the EU’s executive aim to ensure that banks have sufficient resources, particularly debt that can be written down to free cash in a crisis, in order to prevent taxpayer giveaways.
The recent bankruptcies of Silicon Valley Bank and Signature Bank in the United States, as well as UBS’s forced takeover of Credit Suisse in March, served as a warning that problems and failures still occur.
According to the European Commission, the measures will enable authorities to organise an orderly market exit for any size and business model of a failing bank.
The idea update restrictions were put in place following the global financial crisis of 2007–09 to prevent banks from becoming too big to fail, leaving taxpayers on the line.
The Single Resolution Board handles the failure of a large bank in the EU under existing standards, but winding down the next tier of lenders is subject to various national methods that can end up utilising taxpayer money.
According to European Commission Vice President Valdis Dombrovskis, the proposals aim to make it simpler and more consistent to apply EU resolution standards rather than national practises to this bottom tier of lenders on a case-by-case basis.
Markus Ferber of Germany, a member of the European Parliament, believes that not every failing small bank needs to get into resolution mode.
The market body AFME stated that the proposal to permit the use of deposit guarantee money while shutting down or selling components of a bankrupt bank must not be used to prop up unviable lenders.
They don’t expect an easy debate on these issues, Dombrovskis noted.
The plans are subject to final approval by EU member states and the European Parliament. They also make it more difficult for governments to infuse state help into faltering banks, called precautionary capital, a push used by Italy for Monte dei Paschi in 2017.
A specific date for repaying the loan or selling the bank will be required.
The plans do not attempt to revive a 2015 idea for a pan-EU deposit guarantee programme, and the protection of 100,000 euros per account remains unchanged.