Eurozone Ministers To Draw Up Rules For Bank Bailout

Eurozone finance ministers will meet today to decide when and how the European Stability Mechanism (ESM) bailout fund can come forward to rescue a crippled bank from collapse. ESM which will have an emergency fund of a whopping 500 billion euros. It is aimed at restoring confidence in the Eurozone’s banking sector. Economists consider it an essential step in boosting economic growth in the single currency region.

Eurozone Ministers To Draw Up Rules For Bank Bailout

Policymakers will also draw up a blueprint about how much money the respective government has to supply in a bank’s rescue package, which banks will qualify for the help, and who will have to suffer losses. The plan to establish ESM came at the higher of Eurozone financial crisis in June 2012 when Spanish banks needed billions of euros to avoid collapse. ESM will buy shares of a struggling bank when the need arises, report John O’Donnell and Robin Emmott of Reuters.

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France Supports Recapitalization Mechanism

Thursday’s policy outcomes will help separate bad banks from their governments. French Finance Minister Pierre Moscovici said that he fully supports the bank recapitalization mechanism. Draft guidelines for the meeting revealed that ESM’s share purchasing power will be capped at 10 percent of its total capacity. That means the bailout fund cannot invest more than 50 billion euros in a single bank to rescue it. The government will also have to contribute, and bondholders will have to bear the losses, according to the draft guidelines. 

However, ESM cannot become a shareholder in a failing bank despite investing into it until September 2014 when ECB will establish itself as a Eurozone supervisor. Rules state that before ESM can invest in an ailing bank, the government will have to fund the bank so that its common equity Tier 1 ratio reaches the legal minimum of 4.5 percent.

Eurozone Ministers to Meet Again on Friday for a Separate Plan

After Thursday’s meeting, Eurozone finance ministers will join their other colleagues on Friday to jointly prepare a broader law to shut down or rescue a failing bank. The bank recovery and resolution measures have similar guidelines as European Stability Mechanism. It will lay out directives for whether a bank should be wound down or rescued, and who would lose money. The bank recovery and resolution directive may force large depositors and senior bondholders to take a hit.

Countries including Ireland, Portugal, Greece and Cyprus may appreciate ESM buying stakes in their ailing banks. But Spain has decided not to use this option because it will send a signal to the markets that the Spanish government couldn’t cope on its own.