Brussels to tighten rules on bank bailouts Brussels is to impose more stringent conditions on state bailouts for troubled banks so that shareholders and junior bondholders suffer losses before taxpayers are asked to foot a rescue bill. The imminent revision of the EU state aid controls uses the recent Spanish bank bailouts as a Europe-wide template, ensuring that all 27 member states impose some pain on creditors, even when it is politically inconvenient and those governments can afford to use public funds. Under the European Commission's new rules a higher level of "burden sharing" will be required for shareholders and junior creditors through a mandatory "bail-in," while bank restructuring plans will have to be agreed by Brussels before state support is issued. So far, creditor "haircuts" have largely been forced on countries receiving EU rescue funds, raising fears in Brussels that, without common standards, bank bondholders in economically strong member states will be treated more leniently during a crisis. The tightening of the state aid rules comes years before the planned introduction of a formal EU regime for winding up failed banks by imposing losses on creditors. Senior EU officials fear uneven approaches to bailouts could further drive up relative funding costs for banks in southern Europe, given creditors would see a lower risk of a "haircut" from investments in banks in AAA-rated countries such as Germany or Finland. The updated EU rule book is based on the experiences of Spain and the Netherlands. In the former, junior bondholders were hit and EU restructuring plans agreed before bailout funds were disbursed, while in the latter subordinated creditors were hit when SNS Real was nationalised. However, it stops short of the Cyprus bank restructuring, which imposed losses on senior bondholders and uninsured depositors. The EU is negotiating a directive that could bail-in senior bank creditors but these rules are unlikely to be enforced systematically before 2018. The new state aid guidelines, which will be applied to future bank failures, are under the commission's executive powers. Those involved in the reforms say they could be enforced from the late summer. Senior officials from EU member states are due to be consulted on the plan on Friday. The EU polices state bailouts in order to cut the bill for taxpayers and mitigate the market impact so that banks reliant on public money cannot undercut their rivals who have no support. Through the financial crisis, these rules have become the effective resolution framework for Europe and will remain so until common laws are agreed and resolution funds are built up. This could take five or more years. Since 2008, €1,600bn of taxpayer money has been been pumped into banks and the commission has overseen the restructuring or winding down of around 60 lenders, accounting for more than 20 per cent of all EU banking assets. Provisions in the rules permit state support to be urgently disbursed in an emergency, with provisional authorisation from the commission. However some banks" restructuring plans have taken several years to negotiate. The new rules aim to make pre-approval the norm, as was the case in Spain. Joaquín Almunia, the EU commissioner who enforces state aid rules, has spoken about the revision of the rules as an important opportunity to learn from best practice. He has said the transition to banking union and common bail-in rules "will be characterised by continued exposure of the taxpayers to the cost of banks" failures and by the need to maintain a level playing field in the internal market." "For these reasons, the role of state aid control during this transition period will remain very important as a proven instrument to protect financial stability, the internal market and taxpayers" interests," he said.