EU Directive makes haircut on uncovered deposits a standard in bank bail-ins

General view of the participants in the seminar on Public Investment Banks, organised by the Bureau of European Policy Advisers (BEPA), 22/01/2013. (EC Audiovisual Library).

What happened in Cyprus was neither improvised nor exceptional. Peoples’ bank deposits above the secured benchmark of €100.000 were confiscated according to a very important proposal for a Directive which was forwarded from the Commission to the European Council and the European Parliament last June under the name of “Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directives 77/91/EEC and 82/891/EC, Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC and 2011/35/EC and Regulation (EU) No 1093/2010”.

Bail-in

It’s not clear if the Proposal has been officially adopted but both the Council, the Parliament and all the EU 27 governments had plenty of time to discuss it. In this legal text there is a paragraph which clearly describes the procedure “for the recovery and resolution of credit institutions and investment firms” in case of insolvency as it follows:

“4.4.10. The resolution authorities should have the power to bail-in all the liabilities of the institution. There are, however some liabilities that would be excluded ex-ante (such as secured liabilities, covered deposits and liabilities with a residual maturity of less than one month). Exceptionally and where there is a justified necessity to ensure the critical operations of the institution and its core business lines or financial stability (Article 38) the resolution authority could exclude derivatives’ liabilities. Harmonised application of the possible exclusion at Union level would be ensured by Commission delegated acts”.

In short what happened to the Popular Bank of Cyprus and the Bank of Cyprus was already a standard procedure at least in the minds of the dignitaries in Brussels, Berlin, Paris, London and practically all the capitals of the European Union. Mind you this legislation is not confined only in the Eurozone but refers to all the 27 countries. Actually is a rather straight transcription of similar legislation in force in the United States.

The economic and moral justification of this proposal for a Directive cannot be easily repelled. The Commission notes that the European Union taxpayers have already spent €4.5 trillion to support the banking system. This cannot continue because governments/taxpayers have no more means to go on rescuing banks. On top of that there is a very crucial moral issue in every bank bailout.

The moral issue

All those financial firms are asking for bailouts only if their risky bets turn sour. However it never crossed their minds to share the profits with others in the good times. In short when their placements in every possible market turn out to be profitable, it’s the shareholders and the managers who pocket it. In case that those bets become toxic assets, the taxpayers are called in to recapitalise the banks. This cannot continue.

Until this point the Brussels authorities, and probably the Berlin, Paris and even London decision makers seem to be on the right side. It’s absolutely necessary and fair to prepare a system for the recovery and resolution of credit institutions and investment firms without asking from now on poor taxpayers to pay for other peoples’ sins.

Hiding the truth

The problems however begun with the President of Eurogroup, Jeroen Dijsselbloem, who dared say that the Cyprus solutions will be a standard from now on, in all bank rescues in the European Union that is using the unsecured deposits to bail-in or dissolve the bank. He avoided though explaining that this is not his personal opinion but it is foreseen in a Commission Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL. The reception by the markets and the public opinion would have been quite different, if he had said the whole truth.

Unfortunately it was not only Dijsselbloem who didn’t say the truth. Others like the German minister of Finance Wolfgang Schauble, even tried to cover it up. Many politicians insisted that the Cyprus bail-in using uncovered deposits was an exception. It’s like taking the markets and the public opinion as children who shouldn’t be told the whole truth at once but in…instalments…

The proposal for the Directive can be found here:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52012PC0280:EN:NOT

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