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Posted by on Jul 9, 2013 in Banking | 0 comments

Cautious welcome for EU bailout reimbursement plan by banks

Cautious welcome for EU bailout reimbursement plan by banks

Since 2007, when the seeds were sown for the eventual decimation of parts of the European banking sector, taxpayers in several countries across the continent have reluctantly helped to try and get some major lenders back on their feet. Today, ordinary people are still paying for mistakes made some time ago, but that could soon be about to change courtesy of the European Union.

The EU have launched new guidelines which could eventually see what remains of the bailout process of Europe’s most troubled banks paid off by their investors as opposed to the money coming from the public purse. While such a move would prove popular among ordinary people who have developed a mistrust of the banking sector, those within the industry are a little more sceptical.

Clean-up operation still in progress

To this day, the bailout of major banks is still going on in countries such as the Republic of Ireland, but the plan to let investors take on the burden is one that could pay off. Some in the sector believe this could be a good move, but for smaller and weaker banks, some believe that they could be made more vulnerable by such a proposition.

The new-look plan to cover the cost of failing banks will see shareholders, depositors and bondholders who have more than €100,000 asked to take on the costs arising from any failure. In theory, bigger banks with more investors and customers with large amounts of money saved with them are likely to benefit from such a move, but smaller banks may not.

Small banks hit harder?

While the biggest banks are generally strong enough to cope in the event of failure under the new form of bailout mechanism, smaller banks who don’t have as many wealthy investors or customers may find it harder to stay afloat should they experience any heavy losses. Also, it’s believed that they may find attracting new investors more difficult under the new proposal.

Any upstart lenders looking to start off small may find that asking their investors for help should they run into trouble a little more difficult. This is why some analysts believe a move like this could fail to deliver and keep the banking sector competitive. Investors who know that they’re likely to lose money if something happens beyond their control will almost certainly be put off.

The new way of bailing out troubled banks won’t come into effect until 2018. Before then, banks that are teetering on the brink of collapse deemed ‘too big to fail’ will probably be rescued courtesy of funding from taxpayers’ money, although this approach remains controversial in the extreme, especially as it may come at the expense of vital state-run services.

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