Bank bailouts paid with public money have their days numbered in Europe. The European Union has taken another step to protect savers and prevent taxpayers from having to bear the cost of future financial crises. This comes at a time of near-global economic uncertainty, largely caused by the conflict in the Middle East. In fact, some economists like Niño Becerra were already recommending even keeping cash at home for possible crises.
This has been assured the European Parliament in a statementin which it approves new rules to reform the bank bankruptcy management system, expanding its scope and strengthening deposit protection. These measures seek to make the system more solid and balanced, according to the European Parliament web portal.
The reform is part of the process of strengthening the banking union and aims to avoid past mistakes.
Who will pay for bank failures?
One of the most important changes is that the cost of a bankruptcy will fall mainly on the financial sector itself. Taking this into account, the main actors who will bear the costs in the event of bankruptcy or major financial crisis will be:
- shareholders will bear the first losses
- creditors will participate in the cost
- funds financed by banks will cover part of the impact
In this way, the need to use public money in crisis situations is reduced to a minimum.
Greater protection for savers and small businesses
The regulations strengthen the protection of deposits, especially for citizens and small businesses. Therefore, companies and citizens will no longer have to worry so much about losing their money or savings in the event of an economic crisis, regardless of its magnitude.
The deposit guarantee system will continue to cover up to 100,000 euros per holder and bank, but protection is also extended in certain cases, such as real estate transactions, where higher amounts may be covered.
The position of small savers in the order of repayment in the event of bankruptcy is also improved, which increases their guarantees against possible losses.
There will be more control and new tools to manage crises
The reform also expands the scope of bank resolution mechanisms, which can now be applied to more entities, including some smaller ones.
In addition, new tools are introduced to manage bankruptcies in a more orderly manner, avoiding impacts on the economy and the financial system. Something that has been requested for years and especially in recent times, with the different wars spread around the world or crises like COVID-19.
In this way, the role of deposit guarantee funds is reinforced, which can be used not only to compensate clients, but also to facilitate settlement processes.
They want to avoid bailouts and reinforce financial stability
With these new rules, Brussels seeks to ensure that the European financial system is more resilient and less dependent on public money.
The priority is to protect citizens, secure their savings and prevent future banking crises from again having a direct cost to taxpayers.
In short, it is about moving towards a model in which risks are assumed within the financial system itself, reinforcing confidence in European banking.