The European Union may exempt holders of bank debt issued before 2013 from proposed writedowns, according to a person familiar with the plan.
Exempting debt issued before 2013 is designed to prevent lenders’ funding costs from rising in the near term, said the person, who declined to be identified because discussions are meant to be private. The law would need the approval of Europe’s national governments as well as the European Parliament before it could take effect.
In order to end the need for taxpayer bailouts of failing banks, EU financial services chief Michael Barnier has promised to propose draft rules that would put buyers of long-term unsecured debt in a collapsing bank first in line to take losses.
According to a draft of Barnier’s proposal, short-term debt and derivatives should only be written down by regulators as a last resort if losses from longer-term debt aren’t “sufficient to restore the capital of the institution and enable it to operate as a going concern.”
Writedowns could be applied if a bank was “likely, in the near future,” to drop below its minimum required capital levels, or be unable to meet its obligations to creditors, according to the document. Regulators would also be given the power to forcibly convert a bank’s bonds into ordinary shares.
There is a “growing acceptance on the part of regulators” that the wind-down plans “have to be implemented in a way which does not overly conflict with the ability of financial institutions to refinance themselves in the near term,” said Richard Reid, research director for the International Centre for Financial Regulation.
The cost of insuring debt sold by financial companies fell on speculation the European Union will ease bank funding costs.
Amid efforts to tame the debt crisis, many have suggested forcing investors to share in bailout costs. Last week, German Finance Minister Wolfgang Schaeuble suggested European governments may ease provisions in a planned permanent rescue fund that would require bondholders to share losses in sovereign bailouts.
The commission’s plan would give regulators the power to force healthy banks to sell off parts of their business, in a process known as bank “resolution,” to prevent them from being wound up in the crisis as well.