(Photo: Reuters)
(Photo: Reuters)

The European Union has overhauled its policy on how banks receive bumper bailouts, by unveiling a new set of rules that force lenders to present detailed plans on restructuring before any agreement on a rescue package is made.

Eurozone leaders agreed upon the major policy shift and also confirmed that the new rules will help protect the taxpayer and move the burden of bailing out the banks onto shareholders and junior debt holders.

From 1 August this year, any of the Eurozone's 6,000 banks which require an emergency bailout will have to present a detailed restructuring plan, to prove the institution is capable of tackling existing economic problems.

"Today's changes of the crisis rules are based on the good practices of the last years in dealing with bank bailouts and restructuring," said Joaquin Almunia, the European Competition Commissioner.

"In particular, bank owners and junior creditors will need to contribute before any more taxpayers' money is spent on bank bailouts.

"This will lead to swifter and more efficient restructuring."

Since the onset of the credit crunch in 2008 and the sovereign debt crisis in 2010, the European Commission has revised the state aid rules three times.

Given the collapse of Lehman Brothers bank five years ago, EU leaders are keen to level the playing field among banks located in different member states, which in turn would reduce fragmentation in the banking sector.

Building a Banking Resolution

The EC has ramped up its effort to overhaul banking rules across the Eurozone to make sure taxpayers were not left on the hook for problems created by bad decision-making in banks.

Yesterday, EU leaders debated on the creation of an agency that will have the power to determine the fate of failing banks, after it agreed last month to protect taxpayers from future bailouts.

The new authority would be independent of any particular state and would have the final say on whether a bank should be saved or shut.

EU leaders also debated whether it is possible to give the group a €70bn war chest to use when considering the fate of a bank.

Meanwhile, the Commission also confirmed that there would now be strict limits on executive pay at any bank receiving emergency aid.

For all banks, the EU Council pushed through the plan last month to cap all bankers' bonuses at a maximum of double their salary from 2015.

The measure will come in on 2014's bonuses which will be paid out at the start of 2015.

However, experts say that banks are already racing to overhaul their remuneration structures by bumping up fixed salaries.