Bondholders Would Face Bank Bailout Costs in EU Plan

[Joanne98]

April 15 (Bloomberg) -- Bondholders would bear some of the cost of future bank bailouts under proposals being drawn up by the European Union’s top financial services regulator.

Financial Services Commissioner Michel Barnier will present the plan, part of a paper on EU crisis management, at a meeting of European Union finance ministers on April 17. Under the plan, bond investors would forfeit some of what they are owed if a lender fails and must be rescued with public funds.

“The idea is to set the terms of the debate, to look at more than bank resolution,” Barnier’s spokeswoman, Chantal Hughes, said in a telephone interview yesterday. So-called haircuts that would trim payouts to bond investors are part of the plan which covers “the whole approach to crisis prevention and management,” she said.

The Brussels-based European Commission has already proposed laws to overhaul financial regulation following the worst crisis since the Great Depression. These include plans to establish Europe-wide supervisors for banking, securities and insurance along with a European Systemic Risk Board to monitor threats to financial stability.

The haircut proposal “isn’t a magic wand,” said Simon Gleeson, a financial-regulatory partner at London-based Clifford Chance LLP. Creditors may become less willing to lend to banks which might otherwise survive, said Gleeson. “This is therefore one of those cures which increases the risk of the disease occurring.”

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