Depositors should be the last to suffer losses if a bank goes down, the European Central Bank said on Friday, urging EU lawmakers to spell out this principle in their new directive.
Fears that small savers would end up bearing the brunt of bank rescues have rattled the euro zone since new European rules, stating that a bank’s creditors must lose money before taxpayers, came into force last year.
Commenting on a new draft EU directive, the ECB said lawmakers should make sure depositors, including large companies and banks, should only lose money after other holders of senior liabilities, such as bonds.
“A general depositor preference rule, based on a tiered approach, should be enshrined in Union legislation,” the ECB said in its opinion, which is not binding.
The central bank proposed specific amendments to the directive, which mainly relates to the creation of ‘non-preferred’ senior bonds to help banks build a loss-absorbing buffer for the event of a default.
Investors in this ‘non-preferred’ paper would lose their money before other senior bondholders.
“The ECB welcomes the proposal in the proposed directive for the creation of a new asset class of ‘non-preferred’ senior debt instruments with a lower rank than ordinary senior unsecured debt instruments in insolvency,” the ECB said.
When Italy forced some retail bondholders to take losses as part of the rescue of four small lenders in 2015, mass protests followed and one man committed suicide.
Rome is currently negotiating with Brussels a state rescue of its third-largest, Banca Monte dei Paschi di Siena, using an exception built in the European rules.