Brussels, 21/10/2013 (Agence Europe) - Antoine Colombani, a spokesman for the EU Competition Commissioner Joaquin Almunia, made reassuring noises on Monday 21 October about the very close cooperation between the European Commission and the European Central Bank (ECB) on application of the new state aid rules for banks that came into force on 1 August.
In a letter to Commissioner Almunia on 30 July, the head of the ECB, Mario Draghi, warned the European Commission against over-cautious application of the new rules, laying down that shareholders and junior bondholders must contribute before any public funding is provided to fill capital shortcomings in banks in the eurozone that come to light in the current assessments of bank balance sheets by the ECB and the new series of EBA stress tests. He called for the option for solvent banks to ensure precautionary recapitalisation without over-penalising junior bondholders but would give the banks access to public funding, although under the new rules this is only possible for banks on the brink of bankruptcy. Draghi said that over-strict interpretation of the new rules could damage the very confidence in eurozone banks that he wanted to restore and it was crucial for member states to have safety nets to ensure that resources are available in the event that private sources of capital do not suffice to fill the funding gaps. He said that demanding that junior bondholders cover the losses, as the new state aid rules seem to suggest, could have a negative impact on the subordinated debt market, which might in the future be cautious about the likelihood of a “non-resolution.”
Colombani clarified the Commission's position, saying that under the new rules, a contribution from junior bondholders is only required when there is state aid. For example, if capital requirements are revealed in the stress tests, then a sufficient time will be left for banks to fill the gaps using other means and, as far as possible, from the market and the contribution of shareholders and junior bondholders, before having recourse to public funding as a last resort. There can be exceptions for reasons of financial stability and when application of the rules would be disproportionate vis-à-vis the amount of aid received (as a proportion of the bank's total assets, for instance), but the exceptions are to be decided on a case-by-case basis. (FG/transl.fl)