Draghi asked EU to keep state aid rules for banks flexible
Draghi Challenges EU Bank-Aid Rules Over Forced Losses
European Central Bank President Mario Draghi challenged rules that would bar banks from accessing public aid unless they forced losses on junior bondholders, a central building block of European Union protocols for handling struggling banks.
In a letter to EU Competition Commissioner Joaquin Almunia, Draghi said EU rules need to be clarified so regulators can order technically solvent banks to strengthen their balance sheets without scaring off investors. Draghi said public capital needs to be available -- without wiping out subordinated debt holders or forcing them to convert to equity -- if a bank’s holdings are above regulatory minimums and also below what supervisors deem necessary in a particular case.
“An improperly strict interpretation of the state-aid rules may well destroy the very confidence in the euro-area banks which we all intend to restore,” Draghi said in a July 30 letter to Almunia obtained by Bloomberg News. The ECB president called for the possibility of ‘‘precautionary recapitalizations” that would dilute shareholders without hurting junior bondholders and that also would give banks temporary access to public money.
The ECB will on Oct. 23 announce how it will handle comprehensive assessments of euro-area banks, which are needed as it prepares to take over the currency bloc’s financial supervision next year. The Frankfurt-based central bank has said its reviews need to be tougher than previous rounds of European stress tests in order to reassure investors that euro-region banks aren’t on the brink of another crisis.
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Banks that are still viable but need state aid to boost their capital base should be allowed to receive help without inflicting losses on their junior bondholders, European Central Bank President Mario Draghi told the European Commission.
In a July 30 letter addressed to EU Competition Commissioner Joaquin Almunia, Draghi said imposing losses on junior creditors in the context of such "precautionary recapitalizations" could hurt subordinated bank bonds.
"By structurally impairing the subordinated debt market, it could lead to a flight of investors out of the European banking market, which would further hamper banks' funding going forward," Draghi said in the letter seen by Reuters.
New EU rules on state aid to struggling banks came into force in August 1 after a major overhaul agreed the previous month with the aim of shifting the burden of restructuring a lender from taxpayers onto shareholders and holders of junior debt.
However, "the revised guidelines also foresee exceptions, which would be applicable for financial stability reasons and on a case-by-case basis", a Commission spokesman said in an emailed note on Saturday.
The spokesman said the Commission had worked closely with the ECB after receiving Draghi's letter and following the entry into force of the new rules "to identify in advance any potential challenges and solutions in implementing the burden sharing rules".
The new EU rules address public outrage at the use of state funds to prop up ailing banks during the financial crisis.
Draghi said in the letter mandatory burden-sharing with shareholders and junior bondholders was warranted when a bank was on the brink of collapse or its capital had fallen below the minimum regulatory threshold.
There could be cases, however, when a bank had a viable business model and its capital was above the minimum threshold, but its supervisor still required it to raise additional funds.
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