European officials have finally reached a deal on bank rescues.
After lengthy talks, the region’s finance ministers overcame significant differences over who would pay for future bank failures
Among the key points: taxpayer-funded bailouts will only be allowed under “extraordinary circumstances” and people with less than 100,000 euros in their bank accounts will never have to contribute.
Ireland’s Irish Finance Minister Michael Noonan, who led the negotiations, said he and his counterparts managed to strike a balance that would shield taxpayers but leave countries with enough flexibility to protect their economies.
He called the bank resolution rules agreed “a major milestone in our efforts to break the vicious link between banks and the sovereign [debt]”.
Bank bailouts have stretched government budgets, boosting sovereign debt, forcing some countries to pay more to borrow. Now bank shareholders and bondholders are also responsible.
Fidel Helmer, an analyst with Hauck & Aufhaeser Bank, believes the agreement will reassure financial markets: “In the future wealthy investors will also be asked to foot the bill. That is certainly not very pleasant for the people involved, but it calms the markets to know that states do no longer have to pay for the mistakes of their banks.”
The need for new, clearer rules followed the bailout of Cyprus’ banks and the heavily criticised decision – later reversed – to make all account holders – big and small – contribute to that.
The new rules go into effect in 2018. They also include provision for Europe’s governments to collect levies from banks to be paid into resolution funds as an extra layer of protection for taxpayers.
The eurozone’s rescue fund, the European Stability Mechanism provides an additional safety net.