MILAN Oct 19 Banks that are still viable but
need state aid to boost their capital base should be allowed to
receive help without inflicting losses on their junior
bondholders, European Central Bank President Mario Draghi told
the European Commission.
In a July 30 letter addressed to EU Competition Commissioner
Joaquin Almunia, Draghi said imposing losses on junior creditors
in the context of such "precautionary recapitalisations" could
hurt subordinated bank bonds.
"By structurally impairing the subordinated debt market, it
could lead to a flight of investors out of the European banking
market, which would further hamper banks' funding going
forward," Draghi said in the letter seen by Reuters.
New EU rules on state aid to struggling banks came into
force in Aug. 1 after a major overhaul agreed the previous month
with the aim of shifting the burden of restructuring a lender
from taxpayers onto shareholders and holders of junior debt.
However, "the revised guidelines also foresee exceptions,
which would be applicable for financial stability reasons and on
a case-by-case basis", a Commission spokesman said in an emailed
note on Saturday.
The spokesman said the Commission had worked closely with
the ECB after receiving Draghi's letter and following the entry
into force of the new rules "to identify in advance any
potential challenges and solutions in implementing the burden
The new EU rules address public outrage at the use of state
funds to prop up ailing banks during the financial crisis.
Draghi said in the letter mandatory burden-sharing with
shareholders and junior bondholders was warranted when a bank
was on the brink of collapse or its capital had fallen below the
minimum regulatory threshold.
There could be cases, however, when a bank had a viable
business model and its capital was above the minimum threshold,
but its supervisor still required it to raise additional funds.
In such cases, if the bank could not raise the capital
needed in the market quickly enough, the ECB said state aid
should be possible without junior bondholder getting hit first.
The letter also said incentives should be in place to ensure
that banks did their best to raise private capitals before
resorting to state aid.
The ECB is due to take on oversight of euro zone's lenders
from national regulators late next year as part of the bloc's
plan to adopt a unified system of bank supervision and support,
known as banking union.
The ECB will assess lenders' balance-sheets and run stress
tests on them before that.
The ECB said on Saturday that the letter Draghi sent to
Almunia on July 30 concerned the application of state aid rules
to banks that were deemed viable under the balance-sheet
assessment but had capital boosting needs when stress-tested.
Italian newspaper la Repubblica reported on Saturday that
Draghi wrote to the EU Commission last month asking that junior
creditors be spared any losses in a bank rescue at least until
the banking union is fully operational.