Brussels has called for sweeping powers for regulators to seize failing EU banks, sack board members, and impose haircuts on senior bank debt, aiming to ensure that taxpayers are never again held hostage by high finance.
|EPA image: Telegraph|
The European Commission’s “Framework for Bank Recovery and Resolution” draws on Scandinavia’s hard-line approach during their banking crises in the early 1990s. The goal is to end the pattern of moral hazard and mispricing of risk that generated Europe’s debt woes.
“Banks will fail in the future and must be able to do so without bringing down the whole financial system,” said Michel Barnier, the internal market commissioner Mr Barnier’s consultation paper will lead to a “legislative proposal for a harmonized EU regime” as soon as this summer, with an insolvency structure in place by 2012.
The final phase will be the creation of a European Resolution Authority by 2014, adding a fourth pillar to the EU’s new architecture of financial regulation. EU “authorities” typically have their own permanent staff and powers to override national bodies.
The document said regulators should be given “statutory power” to write down senior bank debt, by any amount necessary, or to convert debt into equity. “Such a power would only apply to new debt (or existing debt contracts renewed or rolled over) after entry into force of the power.”
Worries over the exact shape of the bondholder haircuts caused credit default swaps on senior European bank debt to rise sharply earlier in the day, with the Markit iTraxx Senior Financials index rising 16 basis points to 196.