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By Bloomberg

Marketing troubled banks to investors increases the risk of information leaks and may worsen a financial crisis, the European Union’s top bank regulator said.

If authorities disclose information to potential buyers about a bank’s “risks and valuations” as part of preparations to handle a failure, this could “result in additional uncertainty and in a loss of market confidence,” the European Banking Authority said in guidelines published on its website on May 20.

“Resolution authorities should take into account that, given the limited number of service providers, advisers and potential purchasers in the market, a certain risk of conflicts of interests may be inherent to the sales process,” the London- based EBA said.

The guidelines will have an impact on the new Single Resolution Mechanism for euro-area banks. Elke Koenig, chair of the Single Resolution Board, said in an interview last month that the agency could act as a “facilitator” when it comes to merging or selling troubled lenders.

The SRM is the latest piece of the EU’s banking union project, following the European Central Bank’s assumption last November of oversight powers for banks in the currency bloc. After rescuing five euro countries during the debt crisis, the bloc has sought to tighten financial oversight and prevent another round of contagious crises that spread from sovereign nations to banks and back.

Koenig said she wants to make the private sector understand that “it’s their job to find the solution,” otherwise national resolution authorities and the SRB “will have to auction it in one way or form.”

Sale Price

The EBA said that when “assessing whether advantages to potential purchasers are unfair,” resolution authorities “should take into account that the resolution objectives and the need for rapid action may justify incentivizing purchasers or limiting their risk, in particular in the context of the use of the financing arrangements for these purposes.”

Also, while attempting to maximize the sale price of a troubled bank, resolution authorities “should take into account the need for rapid action, which may be in conflict with prolonged price negotiations or bidding processes.”

The guidelines come into effect on Aug. 1 and will be reviewed in 2017.