By Richard Johnstone | 12 December 2013

The European Union has agreed the rules of its continent-wide rescue scheme for failing banks, intended to ensure that taxpayers are not forced to provide bail outs in the future.

The deal, reached between the Lithuanian presidency of the council of the EU and the European Parliament, sets up a common approach to ensure creditors of the bank, such as bondholders, are required to take on losses from any financial difficulties. These so-called ‘bail in’ procedures effective from 2016 mean the value of bonds could be reduced as part of a rescue plan, while a European rescue fund will also be established.

The agreement between the parliament and government also paves the way for the creation of a banking union across the eurozone, to protect individual nations from large banks going bust.

Rimantas Šadžius, Lithuanian finance minister and chair of the council of European finance ministers, said that the Bank Recovery and Resolution Directive was a powerful set of tools for preventing banks getting into difficulty, and supporting them if they do.
‘Most importantly, it is dedicated to save the taxpayers’ money,’ he said.

‘This is one of the major steps in developing banking union [and] it fulfills a key task for the Lithuanian presidency.’

Šadžius added that the resolution fund, designed to remove the need for taxpayer bail outs in the event of a financial crisis, would have access to funds equivalent to 1% of deposits across the EU. However, this will not be reached until 2025, and nations will only be able to access money from the scheme once a bail in deal has been agreed.

National governments will need EU approval before any action to recapitalise banks, as happened in the financial crisis. Among the banks taken into public ownership in the financial crisis were the Royal Bank of Scotland in the UK, Allied Irish Bank, Bank of Ireland and Anglo Irish Bank in Ireland and Daxia, between the governments in France, Belgium and Luxembourg.