EU makes major changes to rules on state aid to banks

Wed Jul 10, 2013 7:33am EDT
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By Foo Yun Chee

BRUSSELS (Reuters) - Europe overhauled the rules covering state aid to struggling banks on Wednesday, in a major policy shift that will put the burden on shareholders and junior debtholders when it comes to restructuring an unstable institution.

From August 1, any bank in the European Union that needs help from the state will first have to present a detailed restructuring plan that ensures its viability before any aid can be disbursed. Currently, aid comes before a restructuring plan.

And the burden on financing the overhaul of an institution will fall first on its shareholders and junior bondholders before any taxpayer money can be used.

"Today's changes of the crisis rules are based on the good practices of the last years in dealing with bank bailouts and restructuring," said Joaquin Almunia, the European commissioner in charge of competition policy.

"In particular, bank owners and junior creditors will need to contribute before any more taxpayers' money is spent on bank bailouts," he said.

The rule changes are an attempt by the European Commission, the EU executive, to level the playing field among banks located in different member states and reduce fragmentation in the banking sector.

Currently, a troubled bank in one country might receive strong support from the state, protecting shareholders and creditors, while another in a separate country might get marginal assistance.

The changes meant that, in theory, all banks will be treated equally and taxpayers will be better protected.   Continued...

European Union Competition Commissioner Joaquin Almunia addresses a news conference on state aid rules for airports and airlines in Brussels July 3, 2013. REUTERS/Francois Lenoir