In June 2012, the European Commission outlined a set of proposals for dealing with failing banks in the E.U. Known as the “E.U. framework for bank recovery and resolution,” the proposals didn’t receive much public attention at the time, but in hindsight they should have, because at their core is a startling premise: the hitherto guiding principle of “too big to fail” should no longer apply to troubled banks and other financial institutions. Instead, they should be allowed to go under, in as orderly a fashion as possible, and the financial burden shared by creditors and depositors, rather than automatically shouldered by taxpayers. The Commission has some executive powers but its proposals aren’t always accepted by the E.U.’s 27 member states. However, nine months after the publication of that document, it is increasingly clear that this premise has become a central plank in Europe’s strategy to combat continuing financial problems and create a fully fledged banking union. The Cyprus rescue agreed to over the weekend is the most obvious sign: European taxpayers will be paying $13 billion for the latest E.U. bailout. But Cyprus’ two biggest banks have been folded together, and their depositors and creditors are on the hook for the $7.5 billion “bail-in” that Cyprus itself must deliver as its contribution to the rescue package. (MORE: Cyprus Rescue: The Destruction of a Tax Haven) Cyprus is the first country to have received this treatment, but it isn’t the first case of an imposed bail-in. A precedent was set by Denmark, when it imposed losses on senior creditors at tiny Amagerbanken and Fjordbank Mors in 2011. Earlier this year the Dutch government took a much bigger step when it rescued SNS Reaal, a troubled real estate lender, and in doing so, expropriated its subordinated bondholders to recoup about $1.3 billion. At the time, the Dutch Finance Minister Jeroen Dijsselbloem suggested that the government even considered confiscating SNS’s senior bonds, but decided against doing so because of fears of the effect this might have on stock and bondholders of other big Dutch … Continue reading With Cyprus Bail-In, Europe Bids Adieu to ‘Too Big to Fail’