March 19, 2012 / 2:20 PM / 5 years ago

Funding cost fears delay EU bank crisis plan

* EU consultation on imposing bondholder losses

* Some countries fear bank funding costs will soar

* EU's Bowles urges Barnier to push ahead with some elements

By Huw Jones

LONDON, March 19 (Reuters) - European Union plans to impose losses on the bondholders of ailing banks have been further delayed amid concerns they could increase banks' borrowing costs, EU officials said on Monday.

The EU's executive has drafted a law with measures designed to shield taxpayers from having to prop up lenders in another financial crisis by sharing the burden of a wind-up or rescue with bondholders.

The bloc's member states have pumped in some 3 trillion euros into the banking sector since the crisis began in 2008, helping to trigger a wave of public spending cuts to bring government finances back under control.

On Monday EU financial services chief Michel Barnier, who is responsible for producing the draft law, was unable to give an exact date for its long-delayed announcement.

Barnier is proceeding cautiously because his plan to allow the imposition of losses on bondholders has prompted concerns that investors will demand far higher premiums for buying bank bonds if they know there is a higher risk of default.

The so-called bank crisis resolution measures had been due last September but now face further delay as some EU states are worried about this central element of forcing bondholders to take a hit.

Barnier will hold a "mini consultation" on this aspect in a bid to reassure worried countries, two senior EU sources said.

It will involve national treasuries, the European Central Bank and the European Parliament.

"Concerns have been expressed about what would this mean in funding costs for banks," one of the sources said.

"There are some countries that are very nervous as they think it will cause shocks to their banks," the second source said. Investors, knowing their bonds may take a hit, would ask for higher interest as compensation.

The ECB has channelled a trillion euros in low-interest three-year loans to banks in the EU to help them deal with large, immediate funding issues but policymakers want them to stand on their own feet eventually by tapping investors.

Barnier said on Monday he hoped to publish his draft law as soon as possible, signalling that he did not want it to undermine a bailout of Greece. Bondholders of Greek debt had to accept steep losses on their investment.

Sharon Bowles, UK Liberal Democrat chairman of the European Parliament's economic and monetary affairs committee, urged Barnier to push ahead with publishing the bulk of his draft measure now and leave the bondholder-losses element for later.

"They should get as much as they can out there," Bowles told reporters on the sidelines of a Chatham House event in London. "There is an awful lot we could be getting on with in terms of coordination."

She has already proposed amendments to a separate draft EU law on bank capital for the European Banking Authority to coordinate the few national bank resolution mechanisms that have been set up in EU states like Britain.

The Barnier measure also includes provisions for setting up a bank resolution authority in each member state and forcing banks to write a "living will" or a document showing how they could be wound up quickly without destabilising markets.

These two elements could be proposed immediately, Bowles said.

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