EU watchdogs to get more powers to freeze bank payments

Eurozone banks could be forced by watchdogs to suspend their payments to some creditors for a maximum of five days if there are risks of bank failure, a draft EU law said, granting regulators power to intervene early to prevent crisis. The proposal is part of a wider review of EU rules meant to reduce the cost to taxpayers of bank rescues, while imposing losses on lenders' creditors - a so-called bail-in.
Under the draft law, seen by Reuters, foreign creditors will also benefit from some minor exemptions from bail-in obligations. National and European watchdogs can already prevent banks from making payments when lenders are already deemed to be failing, under bail-in rules that came into effect this year.
The draft law, expected to be published by the European Commission next week, gives regulators the extra power to intervene preventively to assess whether there is a risk of failure. "Such power can be activated when it is necessary to determine whether early intervention measures are necessary or whether the institution is failing or likely to fail," the draft law said.
Under the proposed rules, payments to shareholders and bondholders can be preventively frozen, but covered deposits or payments to central counterparties will not be affected. The suspension "shall not exceed five working days," the draft law said.
The draft proposal also introduces exemptions for banks' foreign creditors in the application of the bail-in instrument. Foreign countries have opposed the recognition of bail-in contracts in Europe, forcing in certain cases EU banks to cease business, such as trade financing, in non-EU countries.
In a bid to eliminate these constraints on European banks, which are already retreating from several foreign activities, the Commission proposed to grant a limited exemption. The waiver for foreign creditors can be allowed when "it is legally, contractually or economically impracticable for banks to include the bail-in recognition clause for certain liabilities," the Commission proposal said. A senior Commission official said this exemption does not apply to liabilities that are used to absorb losses, such as shares or bonds. For the proposal to become law, a backing of EU states and the European Parliament is required.