October 13, 2016 / 3:47 PM / 2 years ago

Bail-in should apply only to new bonds, Italian banking head says

BRUSSELS, Oct 13 (Reuters) - The European Union’s new rules imposing losses on investors in failing banks should apply only to financial instruments sold from this year, the head of the Italian banking association (ABI) said on Thursday.

The EU introduced rules in January that force shareholders, bondholders and even large depositors to cover losses of at least 8 percent of a bank’s liabilities before it can be rescued with public funds. The aim is to reduce taxpayers’ costs for bank bailouts, which soared after the 2007-08 financial crisis.

“I continue to believe that the retroactive bail-in is illegitimate,” the ABI chairman, Antonio Patuelli, told a news conference in Brussels. “You cannot buy bonds and be told later that rules have changed with a retroactive effect.”

Italian savers have been buying bank bonds for decades, as a relatively safe investment. When bail-in rules were introduced, the risk of their holdings increased.

The new rules had been discussed for years, giving time to investors to adapt, according to supporters of the regulatory regime. But the Italian government of Matteo Renzi is reluctant to apply bail-ins for the rescue of ailing banks, fearing the outcry of savers and voters.

A private plan has been devised to salvage Banca Monte dei Paschi, whose shares are at record low because of a mass of bad loans in the bank’s balance sheet, with no direct state support to avoid triggering the bail-in.

“The bail-in has fortunately never been applied so far, but it has already generated panic and worsened the confidence crisis,” Patuelli said.

The rules were meant to increase financial stability, but their introduction has coincided with a collapse of European banks’ shares. They have lost nearly 25 percent of their value since the beginning of the year, amid low interest rates, high regulatory burdens and persistent economic woes in Europe.

Reporting by Francesco Guarascio, editing by Larry King

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