EU drafts plan to add new bank creditor class to bear losses

By Francesco Guarascio. BRUSSELS (Reuters) – European banks would be able to issue a new category of debt that could be wiped out in a crisis only after shares and bonds but before more secured instruments, such as covered deposits, under a draft EU law seen by Reuters on Tuesday.

Offices of an official European Union building are illuminated at dusk in central Brussels December 1, 2014. REUTERS/Yves Herman
Offices of an official European Union building are illuminated at dusk in central Brussels December 1, 2014. REUTERS/Yves Herman

The proposal aims at facilitating the building up of banks’ capital buffers against losses at time when shares and bonds are losing value, forcing lenders to pay more to build the required cushions.

The draft law, to be published by the European Commission on Wednesday, would create a new category of “non-preferred” debt instruments that would be bailed-in — suffer losses — only during a bank resolution, the draft text said.

The document is part of a wider legislative package aimed at reviewing EU rules on capital requirements for banks.

Only debt instruments with a maturity of one year, and that are not derivatives, can be included in the new class. Lenders issuing such instruments will have to stress in contracts their ranking, which will be lower than secured debt such as covered deposits, derivatives or tax liabilities.

The law is also aimed at creating a uniform ranking of bail-in-able liabilities across EU countries, which have so far applied in divergent ways new bail-in rules in force since the beginning of this year.

The bail-in regime is meant to reduce taxpayers’ costs during bank crisis, while increasing losses for the lenders’ creditors.

The Commission’s new proposal would apply only to instruments issued after the entry into force of the new rules from July next year.

EU states and the European Parliament will have to back the proposal before it can become law.

(Reporting by Francesco Guarascio; Editing by Alastair Macdonald and Alexander Smith)

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