The European Union (EU) has moved one step closer to forming a long-heralded banking union after finance ministers agreed on a new deal for bank bailouts. Tthe deal came as European leaders meet in Brussels to hammer out Europe-wide policies.
European Union finance ministers tried and failed to tackle the banking issue in negotiations last week but they finally struck an agreement in the early hours of Thursday morning.
According to the deal, in the future, taxpayers will not take the first hit when struggling banks need a helping hand.
Instead, the bank’s creditors and shareholders will take the first hit, followed by those with savings of over $130,000 in the bank.
A taxpayer funded bailout of failed banks will now only be a last resort.
Eurogroup President Jeroen Dijsselbloem said, "That's a major shift from the public means from the taxpayer, if you will, back to the financial sector itself, which will now become for a very large extent, responsible for dealing with its own problems."
Europe’s banking sector has been hit hard by the world financial crisis and sovereign debt crises across a number of European Union countries.
Countries like Ireland, Britain and Germany have had to pump billions of dollars of fresh money into struggling banks to keep them from collapsing.
Wolfgang Schaeuble, the Finance Minister for Germany, Europe’s largest economy, said it’s clear that in principle when banks get into difficulties in the future, the taxpayer should not be the first in line to pay.
Instead, a so-called banking union for Europe will be eventually established which would be aimed at creating financial stability across Europe.
European Union governments will still have to negotiate the legislation with the European Parliament - but the rules could come into effect by 2018.
Financial analysts said Thursday that the decision will be good for the markets because it creates some certainty that individual states will not have to prop up failing banks in future.
But Joe Rundle, head of trading at Britain’s ETX Capital, said it’s yet to be seen how the policy will play out.
"I think the big fear is when it comes to a bank in trouble, is, are the countries going to stick to the rules or are there going to be exceptional circumstances which require a different set of rules for that bank," he said.
Also on Thursday the heads of the European Parliament and European Commission agreed on a new European Union budget for the next seven years that is worth $1.3 trillion and will finance EU projects through the year 2020.