EU publishes bank failure resolution rules, but will they work?

Earlier this year, European Union officials hinted that they would soon release updated regulations for dealing with systematically important financial institutions on the verge of failure. The rules follow the Cyprus bailout, which saw a dramatic change in policy where private depositors and debt holders suffered heavy losses as opposed to using taxpayer funds to rectify the shortfalls.

According to Bloomberg News, The European Commission, the bloc's executive branch, published what it believes will finally bring some normalcy to the international finance industry. The major goal, official say, is to reduce the taxpayer burden if and when large banks start to go under. 

"Today's changes of the crisis rules are based on the good practices of the last years in dealing with bank bail-outs and restructuring," Joaquin Almunia, one of the EU's top banking regulators, said in a statement. "Bank owners and junior creditors will need to contribute before any more taxpayers' money is spent on bank bail-outs."

Specific requirements include the need for case-by-case outlines for a restructuring, which would provide some of the necessary funding for the bailout. This method was first utilized in Cyprus, when that nation's largest banks were forced to sell off assets and ultimately merge before the EU approved emergency funds. Banks may also need to create "living wills," wind-down plans that have already been created by systematically important U.S. banks.

Will these regulations actually have a positive impact? It's tough to say at this time, although it could lead to greater anxiety about the health of Europe's biggest financial institutions. The fact that senior creditors and, if necessary, depositors, could be forced to realize losses may create the conditions for a bank run if markets deteriorate. Investors, therefore, might want to explore ways to protect their portfolios from market risk, such as the purchase of cash flow real estate. Learn more by exploring today.