The Parliament and the Council of Europe have reached a political agreement on the draft Bank Recovery and Resolution Directive towards setting up an EU system to deal with struggling banks. Moreover the agreement intends to come into force in 2016, earlier than the initial term foreseen (2018). Concretely, the Directive is to enter into force on 1st January 2015, and the bail-in system is to take effect on 1st January 2016. It establishes a bail-in system which will ensure that taxpayers will be the last to pay the bills of a struggling bank, obliging shareholders and creditors to assume future losses in banking crisis.
Moreover each MemberState will establish a fund for the aid of banks in order to help them recover or to wind them down. The funds would be built up through bank contributions and by 2025 should reach the level of 1% of the covered deposits of the banks in that country.
Deposits under 100.000 Euros will be safe and guaranteed in case of any bail-in, but those which surpass that number, private persons and SMEs, will only exceptionally have to assume any debts when the bank is no longer able to assume its debts.
To improve a struggling bank’s recovery prospects and foster general economic stability, bail-ins would apply at least until 8% of its total assets have been lost. In most cases, this would mean shareholders and many bondholders would be wiped out. Above this threshold, the resolution authority may allow the bank to access resolution fund money up to a maximum of 5% of the bank’s assets.
Only in exceptional circumstances, it may be necessary and indeed beneficial to bring in public money, notably in the form of bank recapitalisations. However the scope for such interventions is tightly framed.