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Battle looms over regulation of smaller EU banks - Metro US

Battle looms over regulation of smaller EU banks

FILE PHOTO: Koenig, head of the Single Resolution Board, testifies before the EU Parliament's Economic and Monetary Affairs Committee in Brussels

LONDON (Reuters) – A review of European Union rules for dealing with failing banks should not become an escape route for medium-sized lenders to avoid tougher requirements, a top EU regulator said on Tuesday.

Elke Koenig, chair of the Single Resolution Board, which deals with failures at the EU’s top lenders, said targetted changes were needed to the bloc’s rules for failing lenders that aim to avoid the taxpayer bailouts seen during the financial crisis over a decade ago.

But there is already a growing debate over whether medium-sized lenders should face similar requirements as top lenders, meaning they would have to issue special debt known as MREL that could be written down to avoid public aid in a crisis, and structure themselves so they could be shut down smoothly and quickly.

Ignazio Visco, governor of the Bank of Italy, home to many medium-sized lenders, said in January that most such banks are not equipped to tap capital markets to issue MREL, and the cost of issuance could “even force some of them out of the market”.

“I would strongly disagree. You can’t have banks, call them this middle class, which are competing in the market and somehow get an easy way out” Koenig told the European Parliament.

“We need to make these banks operationally resolvable, these banks need to build up the necessary MREL. This might not be as much MREL as you might have for a globally systemic important bank.”

Medium and smaller banks come under national rules, leading to what critics have described as back door state aid.

“We may need to develop proportionate and consistent solutions to effectively manage the failure of all categories of banks, regardless their size and business model,” the EU’s financial services chief Mairead McGuinness said last week.

(Reporting by Huw Jones. Editing by Mark Potter)

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