In reaching agreement on a proposal to deal with state banks in trouble, the E.U. finance ministers sent two messages: taxpayers would be protected from any open-ended obligation to bail out failed banks and those banks would not be allowed to capitalize on being bailed out. Given the furor that had been unleashed when the E.U. went after depositors in the two largest Cypriot banks, the E.U. ministers were careful to point out “that depositors with less than €100,000 ($130,820) in their accounts would always be safe, while small and midsize companies and bigger savers would only be hit during the most severe bank failures.” Systemically important banks whose failure could be expected to cause the E.U. financial system to collapse would be handled on a case by case basis.
Will the euro be fortified by a federal bank-bailout program? Source: Estonia Free Press.
In the E.U. finance ministers’ proposal, states would build resolution funds by charging banks levies. In activating its fund, a state would have to impose losses on at least 8% of a bank’s total liabilities. Bank bond-holders and stockholders would take most of the hit, and in this regard the E.U.’s route would differ appreciably from that of the U.S. in 2008 wherein the banks and their executives were protected. The state resolution funds would only be allowed to protect a maximum of 5% of a bank’s total liabilities. Poorer states could borrow from the E.U.’s rescue fund, the European Stability Mechanism. It could be used to recapitalize failing banks directly, “but only to protect depositors—not shareholders or bondholders.” In this prioritizing of taxpayers and depositors, the E.U. seems populist in nature—in contradistinction to the more plutocratic American model. That is to say, we can glimpse a subtle albeit important cultural difference between the E.U. and U.S. in terms of how much financial elites are made to suffer in bank bailouts.
1. Gabriele Steinhauser and Tom Fairless, “EU Pact Reached on Failing Banks,” The Wall Street Journal, June 27, 2013.