Europe’s bank rescue rules risk rebounding on governments

New European Union rules on bank rescues, aimed at ending spectacular bailouts with public money, are already facing a political backlash on worries they may end up hurting small, unsophisticated investors.

The EU’s Bank Recovery and Resolution Directive, due to become fully effective on Friday, makes shareholders, creditors and even large depositors liable for the losses of a failing bank before any public money is used to save the lender.

The directive was a central part of Europe’s response to the global financial crisis, which saw hundreds of billions of euros of public money having to be ploughed into failing lenders, including Britain’s Royal Bank of Scotland and Germany’s Commerzbank.

Only days before the new rules go live, concerns about the high political and economic cost of imposing losses on small savers have come to the fore, with Italy offering an example of how things can go wrong.

Around 10,000 Italians lost money they had invested in the bonds of four local banks that were rescued last month. One pensioner took his own life after seeing his savings go up in smoke.

Some European policy makers are already calling for the new rules to be phased in more gradually...