EU finance ministers work on a plan to handle failing banks

European Union finance ministers will today try to hammer out a blueprint for rescuing or winding down failing banks, aiming to lift the burden on the taxpayer and avoid a repeat of the chaotic Cypriot bailout.

The meeting in Luxembourg comes after finance ministers from the 17 eurozone nations yesterday tackled a related problem: exactly how and when money from a bailout fund known as the European Stability Mechanism (ESM) can be used to prop up a failing bank.

A draft of the guidelines seen by the Associated Press news agency suggested that the ministers would agree only to dip into the €500bn (£426bn) bailout fund to recapitalise banks if they threatened the eurozone’s financial stability and the host country was unable to provide the funds itself.

The plan is to resolve banks’ problems before they drag the economy down with them. It was this link which forced Cyprus to appeal for a €10bn bailout in March: the government was unable to cope with the massive debt their banks sustained when the Greek economy collapsed.

An initial bailout plan requiring all bank depositors to forfeit some of their savings provoked outcry. This was swiftly revised, but people with large deposits in the two biggest banks did take losses and the lack of clarity damaged confidence in the bloc’s banks.

The 27 EU finance ministers want to work out a step-by-step plan for exactly when and how a struggling bank is closed or recapitalised, and in what order creditors and investors lose money.

They want to avoid more EU bailouts with taxpayers footing the bill, but members of the bloc are expected to clash over which depositors and investors will be exempt from any so-called “bail in”. Governments are arguing that forcing certain investors to bail-in damages financial stability.

Setting up a eurozone-wide system for dealing with struggling banks a key pillar of the banking union that the bloc has agreed to implement, but progress has been slow.

“The banking union is an important element in creating more trust in the European banking sector,” the German Finance Minister, Wolfgang Schäuble, said yesterday.