BBC News - EU agrees euro rescue fund guidelines for banks

Eurozone finance ministers have agreed guidelines on how the eurozone's emergency bailout fund can inject money directly into struggling banks.

German Finance Minister Wolfgang Schaeuble said many details were yet to be agreed upon

The power to directly help banks by the 500bn euro ($660bn; £427bn) European Stability Mechanism is seen as a key move in stabilising the eurozone area.

The ESM will be able to inject up to 60bn euros into troubled lenders.

However, governments will have to ensure that banks seeking aid meet minimum capital requirements.

Banks with a capital buffer - a tier one common equity ratio - below 4.5% would have to receive help from their own government before the ESM can step in.

In addition, the bank's shareholders, bondholders and possibly even large depositors, may also have to contribute ahead of any funds from the ESM, a process known as a bail-in.

"This instrument will help preserve the stability of the euro area and remove the risk of contagion of the financial sector to the sovereign, thus weakening the vicious circle between banks and sovereigns," said the chairman of eurozone finance ministers, Jeroen Dijsselbloem.

"An appropriate level of bail-in will be applied before the bank is recapitalised by the (bailout fund), in line with EU state aid rules and applying principles of the forthcoming bank recovery and resolution directive," he added.

Details

A decision to allow the ESM to help out banks was made in June 2012, when the Spanish banking system needed urgent funding.

However, Germany has been wary of allowing the fund to bail out banks without national governments sharing the burden.

Speaking after the meeting of ministers, German Finance Minister Wolfgang Schaeuble said: "`We have made an important step on the way to the banking union by agreeing on the main points for a future regime for direct bank recapitalisation."

However, he added that many details were yet to be agreed.

"We must avoid that there are false expectations in connection with the direct bank recapitalisation," he said.

"Those that expect any bank that needs capital can go to the (bailout fund), that's nonsense."

On Friday, finance ministers are expected to try to agree rules over how to apply a share of any losses to large depositors when banks fail.

When Cyprus sought financial help in March, one of the conditions imposed was that large depositors in its two biggest banks had to contribute to the banks' restructuring, the first example of a eurozone bail-in.