Germany, Italy push for changes to Europe's rules on bank failure

BRUSSELS (Reuters) - European Union regulators should consider the social impact of winding down banks when they apply new liquidation rules that could affect depositors, retail investors and senior bondholders, a German-Italian joint paper said.

The document, seen by Reuters, appears to challenge rules on bank failure in force since last year and that aimed to stop taxpayers having to rescue failed banks by mandating that bondholders, shareholders and uninsured depositors bare the brunt of any losses.

The rules have been criticized by Italy, which reached a preliminary deal with the EU this month for an exception so it could use public money to rescue Banca Monte dei Paschi di Siena BMPS.MI, the country's fourth biggest lender.

Many Italian banks have a high number of retail investors, and the government wants to protect them from losing all of their investments when a lender fails.

Germany has previously been a staunch defender of the rules that it helped shape after the 2010-2012 euro zone debt crisis.

Berlin now says it recognizes the social impact may need to be considered when a bank is put under "resolution", the EU procedure to liquidate a failing lender that was applied for the first time in the case of Spain's Banco Popular when it was rescued last week by Santander SAN.MC.

In the joint paper, Germany said banks’ customers were diversified and “in some cases deserve more protection” as they were not always well informed about risks of bank failure.

“This may also have an impact on the way resolution is managed due to the different social impact,” the paper said.

Current rules only focus on protecting financial stability and reducing costs for taxpayers.

Bail-in rules have never been fully applied so far. The resolution of Popular spared depositors and senior bondholders.

Italy is now in talks with the EU on a rescue plan for two struggling banks - Veneto Banca and Popolare di Vicenza. Whatever the outcome of those talks, depositors would not be affected, a Commission spokesman said on Tuesday.

Editing by Edmund Blair