First Country to Bail In Bank Creditors Urges EU to Revamp Rules

(Bloomberg) -- Denmark is calling for a change to European rules detailing how national authorities should deal with collapsed banks, saying they leave the door wide open to taxpayer bail-outs of smaller institutions.

Lawmakers passed the Bank Recovery and Resolution Directive seven years ago to prevent a repeat of the rescues that followed the financial crisis. Yet countries are still coming to the aid of smaller lenders, Karsten Biltoft, the head of financial stability at Denmark's central bank, said, after the release of a new report on winding down failed lenders.

“Recovery and resolution in Europe should not only be for the few big,” Biltoft said in an emailed response to questions. “Without a credible crisis management regime for the smaller banks, the political will to resolve them without the use of tax payers' money will be at risk.”

The recommendation comes as the European Commission revisits BRRD. In a consultation, the commission has said the goal of preventing bail-outs “has only been partially achieved.”

History has made Denmark particularly concerned. It was the first country in Europe to force senior creditors to take a loss in a bank collapse, after passing anti-bail-out legislation back in 2010. Its banks ended up paying more for funding as a result, until the EU adopted its own measures.

Read More: Denmark Defends Toughest Bail-Ins as EU Deal Readings Vary

Danish authorities still require even the smallest banks to have extra equity and debt, to make sure they have enough funds on hand if they need to be wound down so as to avoid having to resort to taxpayer money. Elsewhere that's a requirement typically made only of the biggest banks. Denmark says it should be widely applied.

“Extending the current framework would give the authorities the necessary tools and powers to handle ailing banks, and entails appropriate safeguards for creditors,” Biltoft said.