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Bank bondholders would be forced to take losses under Noonan plan

The Financial Times has obtained a proposal circulated by Noonan on how Eurozone banks should deal with problems in future.

Michael Noonan is congratulated by European Commissioners Algirdas Semeta and Olli Rehn at the conclusion of last week's marathon meeting.
Michael Noonan is congratulated by European Commissioners Algirdas Semeta and Olli Rehn at the conclusion of last week's marathon meeting.
Image: Council of the European Union

THE BONDHOLDERS owed money by struggling Eurozone banks would be forced to accept mandatory losses if the institutions faced solvency trouble, under plans being put forward by finance minister Michael Noonan.

A three-page memo circulated by Noonan to his counterparts from around the EU – a copy of which has been published by the Financial Times – would mean mandatory losses for the holders of a bank’s bonds, and for some of its shareholders.

Only 5 per cent of a bank’s total liabilities – the amount it owes – could be excluded from the ‘bail in’ scheme, where a bank’s creditors would have to accept losses on their loans.

Beyond that, creditors would be forced to absorb the bank’s losses – with the banks refusing to repay the bonds, instead taking the money to add to its own capital reserves.

Funds could only be excluded after 8 per cent of the bank’s liabilities had been “bailed in”, but the precise hit that each creditor would take would be relayed to the size of the institution’s total liabilities and the size of any other funds available to save the bank.

A “national resolution authority” (in essence, a national government) would have the power to use “other funding arrangements” to recapitalise a bank – but any recapitalisation would be “subject to additional strict conditionality” including needing prior approval from the European Commission.

The Financial Times said the memo had been circulated towards the end of last week’s marathon talks in Brussels, where ministers tried – and failed – to polish off an agreement on exactly who should foot the bill for saving troubled banks in future.

Another meeting has been scheduled for Wednesday, as Noonan – who chairs the meetings of the ‘Ecofin’ group under Ireland’s EU presidency – keen to reach agreement before the presidency moves to Lithuania next Monday.

Ireland has already spent €64.1 billion saving its own banking sector, with another round of stress tests early next year set to indicate whether more state aid might be needed for the country’s troubled lenders.

Read: EU finance ministers fail to agree on who should pay for bank bailouts

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