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* Finance ministers to meet in Dublin on Friday
* Talks to cover new law on division of losses for bad banks
* Irish officials suggest losses on interbank deposits
By John O’Donnell
BRUSSELS, April 10 (Reuters) - European Union ministers will consider a proposal this week to impose losses on interbank deposits of lenders in dire financial trouble as they shape a draft EU law introducing powers that would also penalise those with big savings.
Such an idea, should ministers back it, could further rattle the confidence of lenders, already nervous about draft legislation to determine who alongside shareholders should suffer losses when a bank gets into trouble.
EU finance ministers, gathering in Dublin this Friday, will discuss how to shape this law that could take effect from 2015, covering what is known as bank recovery and resolution.
The talks follow the recent decision to impose heavy losses on some depositors in Cyprus, in return for an international bailout. That set a precedent, which is likely to be mirrored in these EU rules, making losses for large uninsured savers a permanent feature of future banking crises.
But the ministers will have to tread carefully in their discussions.
ECB President Mario Draghi recently cautioned that Cyprus’s bailout was “no template”, in a bid to ease market fears that bank deposits would in future be fair game for international lenders supporting struggling euro zone countries.
In a document prepared by government officials in Ireland, which as holder of the rotating EU presidency will chair the ministers’ gathering, they write that interbank deposits of less than one month should also be penalised.
The proposal will be part of wider talks to consider when, for example, depositors should be penalised if a bank runs into difficulty. This is known as bail-in.
Shareholders are the first to lose their money, with various rankings of creditors behind them.
Customer bank deposits of up to 100,000 euros would remain protected under an existing EU law and the latest proposals touch on sums above this threshold.
“While it is acknowledged that bailing in interbank liabilities may carry certain risks,” officials write in the document, seen by Reuters, “on balance, it is preferable ... that these liabilities are not excluded from bail-in”.
Such a suggestion will dismay many officials, who witnessed a freeze in interbank lending that the European Central Bank is still struggling to unblock despite having provided more than one trillion euros of cheap funds.
At a meeting of EU country officials in Brussels on Wednesday, France and Italy expressed serious reservations about the idea.
Although some policymakers have sought to portray Cyprus and the losses suffered by depositors at two of its banks as a one-off, many experts believe it marks a dramatic change in tack in how Europe deals with troubled banks, to spare taxpayers who have been on the hook for previous bailouts.
Jeroen Dijsselbloem, head of the Eurogroup of euro zone finance ministers, has said that in future, the currency bloc should first ask banks to recapitalise themselves, then look to shareholders and bondholders and then “if necessary” to uninsured deposit holders.
The European Commission wrote the first draft of the law but left it to member countries and the European Parliament to decide whether and when savers should face losses, when a failing bank is being salvaged or shuttered. (Editing by Stephen Nisbet)