The European Commission is set to propose a law within weeks that could let supervisors impose losses on the bondholders of a flagging bank, officials said, a move it has delayed until the end of the year for fear it will panic markets.
The law is part of a European framework on winding up or salvaging troubled banks, seen as crucial to preventing another financial crisis, but which is sensitive because it has echoes of the Greek bailout package, in which holders of Greek government bonds share some of the losses.
Banks are also worried that the new European law would break a finance industry taboo that bondholders are spared losses, making investors more reluctant to lend to banks and possibly compounding a credit freeze.
Banks have said that forcing bondholders, especially senior ones, to take a hit when a bank is in trouble should only be a last resort option.
Earlier this year, the EU's executive began consulting with the industry about the change of rules.
It said at the time: "This might include possible mechanisms to write down appropriate classes of the debt of a failing bank to ensure that its creditors bear losses. Any such proposals would not apply to existing bank debt."
Officials told Reuters that this remained part of the proposal, which if accepted by EU member states and the European parliament, will become EU law.
One official, speaking on condition of anonymity, said the new rules would correct the imbalance between the treatment of bondholders and of shareholders, many of whom lost their investments in banks that failed during the crisis.
"It is all very good saying that banks need more capital. But who will give it?" he said. The EU is prodding banks to raise extra capital to cope with a Greek default. "Why should bondholders be treated more favourably than equity investors?"
A spokeswoman for Michel Barnier, the commissioner in charge of regulating banks, said: "We will publish the proposal this year, in line with our commitment made at the G20, but at a time that is appropriate for the markets."
The new rules would allow a supervisor under the watch of the European Banking Authority to impose losses on bondholders of an endangered bank to keep it up and running.
The authorities would also get other powers to intervene and prevent any repeat of the cross-border chaos such as accompanied the break-up of Belgian-Dutch bank Fortis.
Reuters
