The European Union has struck a deal on rules establishing who will pay for bank bailouts in future without taxpayers having to foot the bill.
The agreement reached by the EU's 27 finance ministers after seven hours of negotiations early yesterday is an important step towards establishing Europe's so-called banking union, with the goal of restoring financial and economic stability to the recession-hit bloc.
The set of rules determines the order in which investors and creditors will have to take losses when a bank is restructured or shut down, with a taxpayer-funded bailout being only a limited last resort.
"That's a major shift from the public means, from the taxpayer if you will, back to the financial sector itself, which will now become to a very, very large extent responsible for dealing with its own problems," Dutch Finance Minister Jeroen Dijsselbloem said.
Exactly a year ago, EU leaders pledged to tackle the euro zone's financial crisis by introducing a banking union, which aims to give the supervision and rescue of banks to European institutions rather than leaving weaker member states to fend for themselves.
Since its announcement, the project has stalled on many fronts, not least because richer countries fear they might have to pay for the banking woes of weaker countries. But yesterday's breakthrough gave the endeavour new credibility by establishing clear rules.
The EU governments will now start negotiating the legislation with the European Parliament.
The finance ministers discussed who should contribute in which order and how much to a bank's rescue - a so-called bail-in - so that ordinary taxpayers are not left with the bill.
"Bail-in is now the rule," Ireland's Finance Minister Michael Noonan stressed, saying the rules put an end to moral hazard by making it clear that banks will suffer before the government might come in to help, if at all.
The rules provide for banks' creditors and shareholders to be the first to take losses. But if that isn't enough to prop up the lender, small companies and ordinary savers holding uninsured deposits worth more than €100,000 (HK$1.01 million) will also take a hit, officials said.
Those forced losses will go as high as 8 per cent of a bank's total balance sheet. Only then will national governments top it up with a bailout.