June 21 - Who pays when banks fail? The European Union is trying to figure out a set of rules which will determine how the euro zone deals with failed lenders. Ciara Sutton reports on the divisive reform.
TV AND WEB RESTRICTIONS**NONE**~ Resolving one of the most difficult questions of Europe's banking crisis - how to shut a failing bank without creating panic and burdening taxpayers. Finance ministers meeting in Luxembourg remain divided over the potential rules. (SOUNDBITE) (English) IRISH FINANCE MINISTER MICHAEL NOONAN SAYING: "I think the issue of flexibility with certain countries wanting more national flexibility and other countries wanting a more centralised system, is probably the main point of disagreement at the present." The European Union spent the equivalent of a third of its economic output on saving its banks between 2008 and 2011. And leaders are keen to reach a decision on how to deal with banks that get into trouble. EU commissioner Olli Rehn. (SOUNDBITE) (English) EU COMMISSIONER FOR ECONOMIC POLICY AND MONETARY AFFAIRS OLLI REHN SAYING: "Midsummer is the longest day of the year so we have plenty of time of finding an agreement tonight." The draft EU law recommends a pecking order in which bank shareholders would take initial losses, then bondholders and finally depositors with more than 100,000 euros in their account - a similar scenario to that seen this year in Cyprus. Members of the euro group yesterday agreed to set aside 60 billion euros from the European Stability Mechanism to help struggling banks - but with tough conditions. Euro group president Jeroen Dijsselbloem. (SOUNDBITE) (English) EUROGROUP PRESIDENT JEROEN DIJSSELBLOEM, SAYING: "This instrument will help preserve the stability of the euro area and help removing the risk of contagion of the financial sector to the sovereign." Governments will have to ensure that banks seeking aid meet minimum capital requirements, and shareholders and bondholders will also be required to contribute. CMC Market's Michael Hewson. (SOUNDBITE) (English) CMC MARKETS MICHAEL HEWSON, SAYING: "With respect to the ESM, there's still concern about legacy issues i.e. Spanish and Irish banks, and whether or not the ESM will be able to recapitalise those banks." While the deal does go some distance to separate problem banks from their governments, details of the new rules still need to be thrashed out. But the progress is being viewed as a key stepping stone towards the euro zone's banking union.