The European Union proposed on Tuesday to make it harder for states to pour billions of euros in aid into an ailing bank, as Italy did six years ago for Monte dei Paschi di Siena. The European Commission’s proposals aim to ensure that banks have sufficient funds that can be written down in the event of a crisis in order to free up cash, in order to avoid the use of state aid packages, writes the Reuters.
The recent collapses of Silicon Valley Bank and Signature Bank in the US and the forced takeover of Credit Suisse by UBS last month are reminders that bank failures can still happen.
According to the European Commission, its proposals “enable the authorities to organize the orderly exit of failed banks from the market, regardless of their size and business model”.
The proposals update rules introduced after the 2007-2009 global financial crisis to prevent banks from becoming “too big to fail”. According to the current rules, the bankruptcy of large banks is handled by the Single Resolution Board, but the liquidation of smaller creditors is regulated by different national systems, which can also use taxpayers’ money.
Published in Brussels on Tuesday and the Bloomberg as part of the package of reform proposals presented earlier by the bloc’s executive body suggested that the national deposit protection funds be called upon to compensate for the lack of resources in banks with insufficient reserves. The goal is to reduce potential losses for taxpayers and savers.
This is because smaller lenders cannot absorb losses to the same extent as larger banks, and some countries have circumvented the strict framework to protect depositors. According to the European Commission’s proposal, deposit insurance funds financed by banks would step in for creditors who do not have enough equity and bonds to cancel.
EU member states and the European Parliament could have the final say on proposals that would make it harder for governments to provide state aid to troubled banks.
Cover image: Getty Images.
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