Eurozone bank rescues ‘a la carte’ until 2015 then only bail-ins

Mario DRAGHI, President of the European Central Bank, participated in the Eurogroup of 24.3.2013. Olli Rehn, Vice President of the European Commission is seen in the background (on the right). Council of the European Union Photographic Library).

Mario DRAGHI, President of the European Central Bank, participated in the Eurogroup of 24.3.2013. Olli Rehn, Vice President of the European Commission is seen in the background (on the right). Council of the European Union Photographic Library).

The fact that the Eurozone does not have a standard procedure to deal with failing or about to fail banks and the national bankruptcy laws of the 17 member states are far from offering a relevant solution, has prompted the two most competent persons in the Union to describe the way such dealings will be realised from now on. Ollie Rehn, vice President of the European Commission responsible for the Eurozone and Mario Draghi, the governor of the European Central Bank on two different occasions described last week, how Eurozone will deal such cases in the near and the more distant future.

Rehn, the Finnish Commissioner speaking last Saturday in an interview at his country’s TV network YLE, revealed that the EU’s legislative bodies are presently discussing a Commission’s proposal for a Directive, which sets the exact procedures for the recovery and the possible resolution of credit institutions and investment firms (see European Sting of 31 March, “EU Directive makes haircut on uncovered deposits a standard in bank bail-ins”). Draghi from his side, speaking last Thursday after the ECB’s regular monthly Governing Council meeting said that until this Directive will be in force sometime after 2015, potential recoveries and possible resolutions of failing or about to fail Eurozone banks will be dealt ad hoc, because currently there is no relevant legislation.

Both of them appeared to agree on three major chapters in this affair, despite using different wording. Firstly, they both were adamant that the secured deposits of up to €100,000 will be untouchable. Secondly, they agreed that the Cyprus case was an exemption. At this point it must be noted, that the initial rescue plan which provided for a 6.75% levy on deposits of up to €100,000 and was unanimously rejected by the Nicosia Parliament, had been an unfortunate ‘invention’ of the Cypriot government. Thirdly, Rehn and Draghi seem to agree that some key provisions of this Commission proposal for a Directive may be applied, before its text will be legally binding. Let’s see all that in detail.

A Regulation ‘a la carte’

The European Commissioner, in his YLE interview, made clear that parts of the large unsecured deposits and investments in Eurozone banks may be used by the authorities to contribute in a possible rescue of a lender. As he explained, this is foreseen by the Proposed Directive now under scrutiny in EU’s legislative bodies, that is the European Parliament and the Council of the European Union. It was exactly the method used in the case of the resolution and the rescue of the two major Cypriot banks, the Popular (Laiki) Bank and the Bank of Cyprus. At the end of the operation the ‘good’ assets of the first are to be absorbed by the second, which will be the only possible survivor, if any.

It is not yet clear what part of the large deposits (above the limit of €100,000) in the two banks will be finally used in the resolution and recovery operations, but information from the island has it, that in the case of Popular Bank it will be 80%, while in the Bank of Cyprus it is estimated to be around 50% of the unsecured deposits. It goes without saying that before touching on the deposits, the Cypriot authorities and the Central Bank of Cyprus have decimated shareholders wealth and unsecured bonds. This is exactly what this Commission’s Proposal for a Directive provides for. Seemingly, Rehn and Draghi while insisting that the Cyprus case is an exemption, at the same time, they both indicated that this method cannot be excluded from the authorities’ arsenal, if other cases appear.

On top of that, Draghi in his Press conference last Thursday, answering a question about Italy, clarified that “the absence of ex ante rules gives the impression of an ad hoc approach in such situations, which is unavoidable in the absence of rules because there are differences in size – in the sense that Spain is not Cyprus – and differences in time in the sense that the events in Ireland and Spain took place at completely different times”. He observed, however, that in dealing with such cases the preferred way is the bail-in, meaning the use of the unsecured deposits and investments in the banks.

Germany VS Malta?

In short, both of them they informed us all that until this Directive become biding, some-time after 2015, the competent authorities will decide ad hoc which method is to be used, to resolve or rescue a failing or about to fail lender. Since time and size matter and the bail-ins of deposits being now a seasonable reality in Eurozone’s member Cyprus, one may deduce that the decisive factor from now on will be only the size. Obviously it means that the method to be used will be quite different if the bank to be rescued or resolved will be a Maltese or a German one. Luxembourg’s rush this weekend to announce a relaxation of the country’s banking secrecy rules, must be a signal of that.

In conclusion, the decisive factor will be the political clout of the bank’s country of origin. If it is a small country, depositors will be held accountable, while if it is a central EU country, taxpayers will be called in to bear the rescue cost {bail-ins (using depositors’ money) or bailouts (using taxpayers’ money)}.

It was exactly like that some weeks ago in bailing-out the Dutch SNS REAAL financial group with taxpayers’ money, in contrast with the two Cypriot lenders, the Popular Bank and Bank of Cyprus, which are presently bailed-in with depositors’ money. It’s the same old story of the powerful imposing their will on the weak.

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