EU regulator calls for tougher regulations on state aid for banks

The European Commission's state aid guidelines are out of date and contradict the 2016 Bank Recovery and Resolution Directive (BRRD) in terms of which creditors are affected when a bank is failing, Elke König told the newspaper.

The European Union's Single Resolution Mechanism (SRM) came into effect on 1 January, implementing the BRRD in the EU area. The mechanism sets out rules on how to resolve, or wind up or restructure, failing banks.

The SRB was set up at the same time, consisting of representatives from relevant national authorities, the SSM and the European Commission to decide when and whether to place the bank in resolution, and to set up a scheme for how this will be done and how the SRF will be used.

In June, the European Commission approved state aid of €4.8 billion from the Italian government to facilitate the liquidation of two banks, Banca Popolare di Vicenza and Veneto Banca, based on the guidelines.

The guidelines require that shareholders and subordinated bondholders contribute to the costs. Senior bondholders, however, are protected, and depositors are fully protected. Under the BRRD, all creditors and shareholders should bear any losses before the taxpayer.

"We need to make sure that we are not putting wrong incentives into the system," König told the Financial Times.

"I think the Commission would agree that there has to come a point where it needs to be changed," she said.

Any change should be carefully thought through to give governments scope to provide some aid, she said.

"You have it in other industries too — that if there is a bankruptcy, to avoid certain mishaps you could consider liquidity guarantees, so I would not rule that entirely out," König told the newspaper.