ECB president Draghi challenged rules on bank aid, letter shows

PUBLISHED : Tuesday, 22 October, 2013, 3:27am
UPDATED : Tuesday, 22 October, 2013, 11:28am

The European Central Bank's president, Mario Draghi, has challenged rules that would bar banks from accessing public aid unless they forced losses on junior bondholders, a central building block of European Union protocols for handling struggling banks.

In a letter to EU Competition Commissioner Joaquin Almunia, Draghi said EU rules needed to be clarified so regulators could order technically solvent banks to strengthen their balance sheets without scaring off investors. Draghi said public capital needed to be available - without wiping out subordinated debt holders or forcing them to convert to equity - if a bank's holdings were above regulatory minimums and also below what supervisors deemed necessary in a particular case.

"An improperly strict interpretation of the state-aid rules may well destroy the very confidence in the euro-area banks which we all intend to restore," Draghi said in a July 30 letter to Almunia. He called for the possibility of "precautionary recapitalisations" that would dilute shareholders without hurting junior bondholders and that also would give banks temporary access to public money.

Draghi's comments come as EU officials squabble over what backstops should be put in place should the ECB decide that individual banks need more capital after a series of assessments next year. The danger under the state-aid rules addressed by Draghi's letter is that subordinated bond holders could dash to dump their investments if a bank was deemed to require cash, risking another round of market turmoil.

The ECB will announce tomorrow how it will handle comprehensive assessments of euro-area banks.


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