CORRECTED-Europe Parliament likely to approve forced losses on wealthy failed bank depositors

Tue Apr 23, 2013 1:57pm EDT

(Clarifies reference to deposits in paragraph 4, adds dropped word in paragraph 5)

* EU law to share pain of bank failure could come in 2015

* Lawmaker Hokmark says will shield small deposits

By Claire Davenport

BRUSSELS, April 23 (Reuters) - The European Parliament's lead negotiator on EU rules for dealing with failing banks said on Tuesday the body was likely to back imposing losses on wealthier depositors but shield small savers.

Talks are under way to finalise EU rules on crisis-hit banks following the bailout of Cyprus, in which both large and small depositors were originally going to be hit before the plan was changed to charge only the former.

The European Parliament's backing is needed for any proposals to become law.

Gunnar Hokmark, a Swedish conservative in the European Parliament, said most categories of deposits would not be protected under proposals likely to be agreed.

"There is a very clear exception for all deposits below 100,000 euros," Hokmark, who will lead negotiations with European Union member states, told a news conference.

The European Parliament has an equal say alongside countries when deciding who among a bank's creditors - bondholders or depositors, for example - must bear the brunt of failures such as those in Cyprus' banking sector.

Hokmark, however, pledged to protect small depositors in EU legislation. "What happened in Cyprus shall not happen again if this legislation is involved," he said.

The initial EU-Cyprus plan, which would have imposed losses on smaller, insured depositors, prompted a large backlash both from depositors and financial markets.

Although some policymakers have sought to portray Cyprus and the losses suffered by depositors at two of its banks as a one-off, many analysts believe it marks a change in tack in how Europe deals with troubled banks, to spare taxpayers who have been on the hook for previous bailouts.

Jeroen Dijsselbloem, who chairs meetings of euro zone finance ministers, has said that in future, the bloc should ask banks to recapitalise themselves, then look to shareholders and bondholders and then uninsured depositors.

The European Commission has written the first draft of the law about how to share out losses when banks run into trouble, designed to prevent EU countries taking a variety of approaches to deal with struggling banks and bondholders.

It is now up member countries and the parliament to decide whether and when savers should face losses, when a failing bank is being salvaged or shuttered.

The plan would mean that when banks need to be shut, the costs would be lower for their home countries and potentially also for the euro zone's rescue fund, the European Stability Mechanism. But it risks scaring investors away from the multi-trillion-euro market for unsecured bonds as well as prompting depositors to move their money elsewhere.

The ECB, which will start supervising big banks in the euro zone from the middle of next year, is also pushing for a framework with 'bail-in' powers, and has suggested that depositors get preference over other bondholders. (Editing by Matthew Tostevin)

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