* Officials warn ministers of risks in banking
* Commission delays contested proposal on failed banks
* Lending to business critical to spur flagging economy
By John O'Donnell
COPENHAGEN, March 30 European Union finance
ministers were warned of the continued fragility of the region's
banks on Friday as the bloc's executive postponed a contested
proposal critics warn could make nervous banks even more
reluctant to lend.
Lending to business is essential to spur economic growth as
the euro zone slides towards recession but Europe's banks,
shaken by the financial crisis, are more reluctant than ever to
give credit to small companies and others considered high risk.
In a report prepared for the EU finance ministers' meeting
in Copenhagen, EU officials warn of possible problems in
banking. They flag the risk that banks would be unwilling to
write down bad loans, something that in turn would prevent them
from giving new credit.
"Developments since the beginning of this year have
surprised on the upside, but risks to the macroeconomic outlook
remain tilted to the downside," officials write.
"If an aggravation of the sovereign debt crisis were to
result ultimately in a credit crunch and a collapse in domestic
demand, this would probably entail a deep and prolonged
It is fears like these that prompted the European
Commission, which writes the first draft of laws to regulate
finance, to delay the announcement of a proposed framework for
winding up troubled lenders.
The EU's executive wants to include rules that would allow
the imposition of losses on a failed bank's bond holders, who
were largely spared during the financial crisis while
shareholders and governments bore the brunt of the cost.
NO MORE BAILOUTS
Critics say the so-called bail-in rules, by laying the
foundation for bondholder losses, would scare off the buyers of
such debt, pushing up the cost of borrowing for banks and making
them more reluctant to lend.
Michel Barnier, the European commissioner responsible for
drafting this and other regulation, has been postponing its
publication for fear of unsettling investors, already rattled by
billions of euros of losses in a Greek debt restructuring.
On Friday, he announced that the proposal would require at
least another month's preparation before being presented to
countries for them to amend or approve.
His officials will use this time to canvas the views of
central banks, who are concerned about the new rules, as well as
They want to gauge the level of political support for
pushing losses on the bondholders not only of failed banks that
are being wound up but also one that is in danger of failing, in
a bid to prop it up. They will also ask what type of debt should
be covered by the rules.
"Bailout ... it's taxpayers who pay," Barnier told
journalists. "Bail-in, it's shareholders and creditors who end
up paying. It must be a possible option. We don't want tax
payers to end up bailing out the banks."
"It is a very sensitive issue and that is why we are taking
a further four weeks, starting today, to discuss with key
stakeholders how to calibrate the proposals on bail in," Barnier
The new rules for failed banks, seen by many experts as one
of the central regulatory reforms needed to strengthen the
financial system, will only apply from 2013 at the earliest.
This is roughly six years after the start of the banking crisis
The delay has upset European regulators, who have informed
ministers that it aggravates uncertainty for investors, said one
official familiar with the matter.
Critics point to the risks that could further drag out
discussions with EU countries, whose blessing is needed for the
proposal to become EU law.
"If the banks cannot raise longer-term money, then they will
have to shrink the amount of credit to the economy, which - in
plain terms - means calling in loans to SMEs and individuals,"
said Graham Bishop, an expert in EU financial policy. "That
would throttle economic growth."
Barnier has unveiled a raft of regulatory rule changes from
curbing banker bonuses to regulating hedge funds since taking
his post more than two years ago. Many have run into stiff
The commissioner may have to abandon part of a proposal for
an EU law to change the way credit rating agencies work.
In the face of opposition from some countries, the
suggestion that debt issuers such as corporates rotate the
ratings agencies they use to rank creditworthiness may be
dropped from a draft EU law, diplomats and officials said.