ECB Stresses Need for Common Framework to Write Off Debts

The European Central Bank (ECB) has stated that all European Union (EU) members should have a common approach to writing off debts so that international lenders in difficulties can be easily supported without using taxpayers’ money.

Although an EU directive with regard to banking resolution is scheduled to be enforced in January, several EU members have made their own rules, and Germany is one of them.

According to EU law, creditors ought to protect the bank as well as the taxpayers. Voicing its opinion on Germany’s draft law, the ECB warned that different national rules regarding debt write-offs will lead to uncertainty. The ECB stated:

A common framework at union level on the degree of subordination of senior unsecured bank debt … may help to avoid fragmentation of the market within the union … for these instruments and to avoid complicating the tasks of the ECB both with regard to monetary policy and to supervision.

Germany’s draft law subordinates some senior unsecured bonds to senior debts such as corporate deposits, interbank deposits, and money market instruments. According to the ECB, this will make the resolution of failing banks easier and would effectively eliminate the “implicit state guarantee” on the debt, well in compliance with the EU’s Bank Recovery and Resolution Directive.

The bank stated:

The ECB welcomes the effective removal of the implicit ‘state guarantee’ by the draft law and acknowledges that these impacts result in principle from the efforts to facilitate resolution.

At the same time, it warned of the uncertainties that remain with regard to debts issued as per the laws of countries that do not come within the European Economic Area.

The ECB said:

There is … significant uncertainty as to the treatment of existing debt instruments issued under the laws of third countries. The crossborder implications of the bail-in tool are a matter of substantial legal complexity, with discussions currently underway in international fora.

The ECB has also criticized some parts of the draft law, particularly those parts that delegate some regulatory powers to the ministry of finance. It has stated that it will not allow any national laws to interfere with its role of supervisor for the biggest banks in the eurozone. The ECB opined that member countries should avoid hindering the “exercise of supervisory discretion by the ECB’ and “uniform supervisory practice.”

Government sources of Germany have stated that the country has no intention of hindering the ECB in any way.