The new bail-in rules are part of a package of German legislation on the European banking union--an ambitious project to centralize bank supervision in the euro zone and, when banks fail, to organize their rescue or winding-up at a European level.
Germany "leads the way" in Europe by implementing European rules quickly and "creates instruments that allow the winding-down of big systemically relevant institutions without putting the financial stability at risk," the country's finance ministry said in its draft bill seen by The Wall Street Journal.
"This ensures that in times of crisis mainly owners and creditors will contribute to solving the crisis, and not taxpayers."
European finance ministers agreed earlier this year on Europe-wide legislation on bank recovery and resolution, which sets a cascading hierarchy of investors who would be hit when a bank fails. These rules will come into force in 2016.
Germany will apply these rules already from next year, according to the bill. Struggling bank creditors, in addition to shareholders, will have to help financial institutions, covering up to 8% of liabilities, before the banks can tap Germany's financial markets stabilization fund SoFFin.
In an expertise report presented Wednesday, Germany's independent Monopoly Commission, which advises the government on competition and regulation issues, said its "skeptical whether market participants can muster sufficient capital buffer to effectively prevent the general public from being held liable."
The SoFFin rescue fund, which was scheduled to be dissolved this year, will be operated until the end of 2015 to bridge the time until a European-wide restructuring fund is in place.
The plan comes as Europe' banking supervisor, the European Banking Authority, conducts a new round of stress tests aimed at making the European Union's financial sector more resilient. The results, expected by the end of October, might reveal a need for fresh capital. Banks failing the tests then have up to six months to raise fresh capital from private investors.
Bankers say that keeping SoFFin alive longer is a sign that the government wants to ensure that the country's regional public-sector lenders, or Landesbanken, would have a last resort should the stress test unveil a capital shortfall.
This Wall Street article, published today, is focusing on Germany when the fire is in Portugal. They don't want that news to rile the markets anymore than it already has.
The second largest bank in Portugal, Banco Espirito Santo, just went Lehman Bros today. They are counterparty to a ton of derivatives. This could be that black swan event that causes the wheels to come off the global central banking casino. It deserves serious watching. Late in the day the WSJ finally took notice: Markets Tumble on Portuguese Bank Woes [Link]