Senior bondholders would take a hit if other forms of debt and shares failed to plug losses when restructuring a troubled bank, draft European Union plans showed on Thursday. Until now, the authorities have sought to protect senior bondholders, who get repaid before other lenders if a bank gets into difficulty. The draft, if approved, would effectively make senior bondholders the bank's lender of last resort in a crisis rather than taxpayers.
"Losses should first be absorbed by regulatory capital instruments, then by subordinated debt, and only be senior claims if the subordinate classes have been written down entirely," the draft obtained by Reuters said. "In particular, equity should absorb losses in full before any debt claim is subject to writedown," the draft added.
The Institute of International Finance, a global banking lobby, said in May that calling on senior bondholders should be the "last resort alternative to winding down the firm."
EU Internal Market Commissioner Michel Barnier was due to publish this month his draft law on crisis management at cross-border banks, which dominate the sector in Europe. The plans were delayed until October to avoid spooking markets as they were expected to stick with plans to keep senior debt holders in the firing line, as confirmed by the draft.
Under the draft, which could still be subject to change ahead of publication, national supervisors would be given powers to replace management of an ailing bank with a "special manager". EU states and the European Parliament will have the final say and can make significant changes before the text becomes law.
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