By Francesco Guarascio
LUXEMBOURG (Reuters) - European Union finance ministers are set to agree on Friday on rules setting the order in which bank creditors would be hit in case of wind-downs, in a bid to accelerate the build-up of banks' capital buffers to reduce the chances of public-funded bailouts.
Under new rules adopted after the 2010-2012 euro zone debt crisis, banks are required to issue loss-absorbing debt that would be used in a liquidation to reduce taxpayers' costs, but that issuance has so far fallen short.
One reason for the slow take-up is the fragmentation of EU countries' rules on the hierarchy of creditors that would be hit first in case of liquidation.
The agreement, likely to be reached in a regular meeting of EU finance ministers in Luxembourg, would define a common EU list of subordinated creditors that would face losses when a bank needed to be rescued.
A new common category of so-called "non-preferred senior debt" would be established. Investors who buy these bonds would be wiped out only after all shareholders and junior bondholders are hit in a bankruptcy, but before other senior creditors and depositors.
This "will provide more clarity" and help investors to assess and price the risk, the EU commission vice-president Valdis Dombrovskis told reporters before the meeting.
The added clarity could also reduce claims of misselling that have partly limited regulators in the application of the new rules.
The new regime, known as bail-in, has been staunchly criticized by Italian authorities on fears that it could scare investors and damage retail savers who were unaware of risks.
The wiping out of bondholders in the rescue in 2015 of Banca Popolare dell'Etruria, a small Italian lender, pushed a pensioner to commit suicide after he lost more than 100,000 euros ($111,000).
Since then, Rome has tried to rescue other ailing banks using an exception to the rules that still permit the injection of public funds into banks and reduce creditors' losses.
EU regulators expect the new rules to speed up banks' issuance of new "bailinable" debt, boosting their financial stability.
The European Banking Authority estimated that Europe's largest lenders need to raise issuance of these subordinated liabilities by 11 percent to meet legal requirements by 2019.