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Wednesday, May 15, 2013

Where do EU member states stand on bank bail-in plans?

It’s been pretty tough to follow where countries stand on the latest proposals for the EU’s Recovery and Resolution Directive, not least because the debate has lasted three years with people mostly talking past each other.

But the Cypriot crisis has now focused minds and a deal is top of the agenda. The proposal will lay out rules for bank bail-ins and dealing with cross-border banks, while it also links closely with plans for a eurozone banking union. To clear up the differences, we have put together a table.

(The table is broadly ordered by how strongly the country is in favour of uninsured depositor preference and how strongly against flexibility it is. Hence Spain which is strongly for depositor preference and little flexibility is near the top, while Sweden which barely favours a bail-in plan and wants significant flexibility is near the bottom – click to enlarge):

As you can see, there are some big splits remaining. The ECB, Spain, Portugal and France (amongst others) want a clear depositor preference regime – where uninsured depositors are the last to be written down. On the other hand, Germany, the Netherlands and the UK want more equality between senior bondholders and uninsured depositors. Going even further, there are Sweden, Poland and Denmark - which have already clearly defined national schemes which do not fit well with the EU plans for a bail-in hierarchy.

Another area of disagreement is the amount of national flexibility. Sweden, the UK and the Netherlands are pushing hard for flexibility, particularly for non-euro members. This has some backing from Germany. Further disagreements over the timeline for implementation and the level of resolution funds needed remain a bit of a free for all.

The few points they do agree on include: complete protection for insured depositors, a broad bail-in scheme and (somewhat ironically) the fact that this legislation is urgent.

We will keep updating the table as the negotiations develop. There is a lot of talk of compromise but as of yet there is a long way to get there.


Rik said...

1. Seniority (or not) is a legal issue. Ranking (seniority) should be basically clear beforehand and for eternity (and beyond).
Probably good to give the regulator some room. First of all in order to avoid banks to go actually bust (and damage is likely bigger for all). But also in order to make a quick resolution possible (eg by making a deal with the junior ranks, like give a few percent to junior bonds just in order to avoid a lot of legal stuff and be able to go one (will be reduced anyway by having strict seniority rules)).

2. National flexibility. Flexibility is ok when a country can clean up its own mess. However what is now happening with Spain is totally unacceptable. They need to be kept alive by the EU (ECB) but simply for all kind of political reasons donot clean up their banking sector.
So no flexibility unless a specific country takes over full responsability and liability and doesnot have to be supported by an EU/EZ institution for that. The moment that becomes uncertain back to no flexibility.

3. Timeline. Will be a long term project. Will not do much good for the present crisis (unless there is another big crisis in this crisis in which case all bets are off).

4. Fund. Similar as 2. Unless it is clear that it will not be on somebodyelse's bill it should be pre-funded. So for the UK acceptable (non EZ) for Spain/Italy not.
Banks have to carry the load themselves to start with. Should be a system in place that makes banks contribute more if they are riskier. More risk higher premiums.
There are such systems.

5. Guarantees. Basically a 2 way guarantee.
- <100K. Senior above everything else partly via guarantee.
- Above that accounts go for senior bonds. Essential is that normal banking operations can take place, like paying bills. In this respect accounts deserve more protection than senior bonds.

However 1. Should be a grandfatherclause as in several countries senior bonds are eqaully senior (so alone for new debt). Messing around with seniority has been a huge problem in this crisis and often was done unnecessary.
However 2. I would give a say 95% guarantee for accounts <100K. Not the seniority. Accountholders simply should move away asap from bad banks. You cannot dump your money in Cyprus or Icesave and think that if something goes bad somebodyelse will make you whole.

Jesper said...

Isn't there also an issue about minimum size of banks capital buffers?

I seem to remember that EU-institutions wanted to standardise capital requirements for all banks across EU and no country would therefore be allowed to put in legal requirements for larger than EU-mandated capital buffers for its banks. Large buffer -> less cost to taxpayer and creditor after failure of bank.

The reasoning was that countries that forced their banks to become safer would get a competitive advantage. Last I heard it was still being negotiated (March of this year).

Sweden wanted to force Swedish banks to become safer but apparently someone had a problem with that. If Sweden wouldn't have been part of the EU then Swedish banks could have been made safer by Swedish legislators but sadly the EU-membership was said to be blocking that...
I suppose what banks want the EU institutions will provide and banks want small capital buffers and high leverage as that will increase profits in good times and the increased losses in bad times? Those are not the banks problem....

If the issue about capital buffers hasn't been resolved then there might be yet another little wrinkle to iron out.

Anonymous said...

Where is Sweden in the table?

Open Europe blog team said...

Many thanks for the comments.


Thanks for pointing that out, it seems Sweden had got cut out of the image we posted.

Have updated so it is now included (at the bottom).

Anonymous said...

There is no such thing as a "bail-in plan." (At least not outside Eurofascist Open Europe's world.)

The word you are avoiding using is confiscation.


The sky didn't fall in, did it? So feel free to use it again.