Europe needs clear order for loss imposition in bank closures-ECB

DUBLIN, April 12 | Fri Apr 12, 2013 5:20pm EDT

DUBLIN, April 12 (Reuters) - Europe must clearly state the order in which it will impose losses on bank shareholders, creditors and depositors when it closes a bank and these rules should be in place from 2015, European Central Bank board member Joerg Asmussen said.

The order of loss imposition in resolving European banks has to be set up as part of a wider so-called resolution framework that would set unified rules for all banks, making potential closures predictable and orderly, he said.

"The urgent adoption is important so that there is up-front clarity about a harmonised resolution framework in Europe and this framework should also include bail-in options from the outset and depositor preference," Asmussen told a news conference.

"The whole purpose is to resolve banks without using taxpayers' money while at the same time maintaining financial stability," he said. "It's preferable that we have these bail-in rules and the accompanying pecking order in place, let's say, in 2015, and not 2018."

European Union Internal Market Commissioner Michel Barnier said that under the proposal now under discussion, bank shareholders would be the first to suffer losses, followed by junior bondholders.

Senior bondholders and large depositors would come last to lose money, while those who had savings of up to 100,000 euros would always be fully protected and get their money back.

The discussion on whether depositors should be forced to pay for the winding-down of a bank started after a messy negotiation of euro zone emergency loans to Cyprus, where, in the end, large depositors were forced to contribute to the cost of closing down one bank and restructuring another.

This sparked a panic among Cypriot bank clients, forcing the Cypriot government to impose temporary capital controls to prevent money from flowing out of the country.

The capital controls are being gradually lifted. Asmussen said they should disappear altogether as soon as possible.

"It has always been the position of the ECB that one should lift these capital controls as quickly as possible. But at the same time authorities have to be careful that one really can afford to lift the capital controls, so probably a sequenced lifting of them is advisable," he said.

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