European Commission VP Almunia: taxpayers may still face cost of bailing out banks

AMSTERDAM – The vice president of the European Commission said Tuesday that taxpayer-funded bank bailouts remain a possibility if the latest stress test of Europe's biggest banks reveals significant capital shortfalls — or if the debt crisis were to really flare up again.

However, Joaquin Almunia repeated that the governments' preferred method remains to force investors such as shareholders, bondholders and ultimately depositors, to pay first.

Speaking at a conference in London, Almunia said Tuesday that Europe's new approach to dealing with troubled banks "has created some debate."

"Logically, investors want clarity on the backstops that will be used," he said. "Let me clarify our position."

He said that troubled banks in need of new capital will have to seek it from private external sources, and then internally, via its own shareholders or junior bondholders. In unusual or dire cases — such as occurred in Cyprus — a bank restructuring could involve imposing losses on senior creditors, including depositors.

"Of course, if financial stability were at risk, the new rules provide for an exception clause," he said. "In this exceptional case, public backstops can intervene before the 'bail-in' takes place."

He that in an emergency situation, the Commission would approve the use of public money to save a big bank. However, bank investors would still suffer losses in the end. In addition, under the new rules, executive pay would automatically be capped at any bailed-out bank.