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EU Targets Senior Creditors - all bondholders forced to take losses in bailouts

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All bondholders should be forced to take losses in an ailing bank under draft European Union proposals which aim to avoid taxpayers again having to fund bailouts in the next crisis. The EU's executive Commission is due to publish the consultation paper as soon as this week to shape its crisis management legislative proposals later in the year.

The paper obtained by Reuters said writing down a bank's stock and subordinated debt may not be enough at times and that national resolution authorities will need "additional writeoff" powers.

The EU executive proposes a tiered model beginning with writedowns of equity and subordinated debt, with senior debt next in line.

"Building on the minimum powers above, the first 'comprehensive' approach aims to make a broad range of senior creditors face the real risk associated with bank failure," the draft paper says.

Authorities would only write down senior debt to the amount "deemed necessary to ensure the credit institutions are returned to solvency".

Writedowns in all cases would only apply to new debt issued, or existing debt contracts rolled over, after the new powers would take effect.

New debt issued by EU credit institutions would be required to include a clause recognising this power, the paper added.

Exemptions

Trade creditors, such as swap, repo and derivatives counterparties, debt with a maturity of less than perhaps nine months, retail and wholesale deposits and secured debt would be exempted from the new writedown powers.

"It is also questionable whether the power could in practice be exercised to claims that are covered by master netting agreements, even if uncollateralised," the paper added.

Global regulators are finalising proposals sketching out how banks could used so-called contingent capital, a hybrid form of debt that converts to equity to boost capital levels in times of distress.

The Commission's paper, which outlines a broad crisis management strategy that also looks at supervision and forcing banks to draw up "living wills", gives qualified backing to the use of hybrid debt.

"Such proposals, if developed would need to be coordinated: while forms of contingent capital and bail-in debt may in theory be complementary, it is unlikely to be desirable or feasible for them to co-exist in practice," the paper says.

"The market for convertible debt will be finite and a proliferation of instruments with staged triggers may weaken the effectiveness of a writedown tool designed for resolution."

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