Plan to protect taxpayers’ money in bank bailouts

The European Commission was today set to unveil new proposals designed to stop taxpayers’ money being used to bail out failed banks.

A new mechanism is to be created allowing authorities to reduce the claims of unsecured creditors – meaning shareholders and creditors bear the losses, not governments and the taxpayer.

It has also been proposed as a way to prevent runs on banks in one country – such as Spain or Greece – pulling down the entire system. The measure would protect taxpayers from a similar situation to that which arose around Edinburgh-based RBS, bailed out by Gordon Brown’s Labour Government to the tune of £20 billion.

The global financial crisis has seen a succession of major banks fail, including Northern Rock, Lehman Brothers, leading Icelandic banks, the Belgian-Dutch giant Fortis and Franco-Belgian Dexia and the Republic of Ireland’s Anglo Irish Bank.

If the plan wins the backing of EU countries and the European Parliament, the law would represent a step in the direction of the banking union championed by ECB president Mario Draghi.

The legislation is unlikely to take effect before 2014, however – too late for Spain, which could be forced to seek a bailout if it cannot refinance its troubled lenders.

The country is currently trying to find more than £65bn to strengthen its capital buffers.

“Everybody’s energy right now should be focused on the current crisis,” said Nicolas Veron, of Brussels think-tank Bruegel.

“I’m not sure we can afford the luxury of thinking about a permanent framework when the houses are burning.”

The Commission’s 156-page draft will suggest giving supervisors powers to “bail in” or force losses onto bondholders of a bank so that taxpayers are kept off the hook.

The proposals came as ratings agency Moody’s Investors Service cut the credit ratings of six German banks and three in Austria.

The biggest bank affected was Commerzbank, Germany’s second-biggest lender, which was cut from A3 to A2.

Moody’s delayed a decision on the rating of Germany’s biggest bank, Deutsche Bank.

“Today’s rating actions are driven by the increased risk of further shocks emanating from the euro area debt crisis,” Moody’s said.

The ratings agency also cut the rating of the Italian bank UniCredit’s German unit, while in Austria it downgraded Erste Group Bank, UniCredit Bank Austria and Raiffeisen Bank International.