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TheStreet Open House

EU Agrees On Bank Failure Rules To Avoid Bailouts

The EU governments will now start negotiating the legislation with the European Parliament.

Following the 2008-2009 financial crisis, countries like Ireland, Britain and Germany each had to pump dozens of billions of fresh capital into ailing banks to avoid the financial system from collapsing.

To avoid that happening again, finance ministers discussed who should contribute in which order and how much to a bank's rescue â¿¿ a so-called bail-in â¿¿ so that ordinary taxpayers aren't left with the bill.

"Bail-in is now the rule," stressed Ireland's Finance Minister Michael Noonan, adding 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. "This is a revolutionary change in the way banks are treated," he added.

The rules foresee 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 euros ($132,000) will also take a hit, officials said.

Those forced losses will go as high as 8 percent of a bank's total liabilities, only then would national governments kick in and top it up with a bailout possibly worth another 5 percent of the liabilities.

The negotiations were complicated because some nations feared being bound by overly rigid European rules. Others warned that too much flexibility would create new imbalances between the bloc's weaker and stronger economies and a lack of common rules would destroy certainty for investors and erode trust in the financial system.

But the rules will now apply equally for the 17 EU nations sharing the euro currency and the 10 member states like Britain that have their own currency, said the Netherlands' Dijsselbloem, who also chairs the meetings of eurozone finance ministers.

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