EU agrees future bank bailout rules

Scofflaw

Future bank failures in the EU will have taxpayer-funded bailouts as a last resort, with creditors over €100k being "bailed-in" first in any attempt to rescue a bank:

The plan stipulates that shareholders, bondholders and depositors with more than €100,000 should share the burden of saving a bank, with a taxpayer-funded bailout now being a limited last resort possibility.

Minister Noonan said the agreement "marks a revolutionary change in the way banks are treated".

The Minister said it is "a major milestone in our effort to break the vicious link between the banks and the sovereigns".

He added that governments will no longer have to save banks that were too big to fail and that "bail-in is now the rule", putting an end to moral hazard by making it clear that banks will suffer before the government steps in to help, if it does at all.

http://www.rte.ie/news/2013/0627/459100-bank-failure-rules-agreed-by-eu-finance-ministers/

Note that the proposal is not law yet, but has to go to the European Parliament first - this is the Council agreement.

IT coverage:

The rules break a taboo in Europe that savers should never lose their deposits, although countries will have some flexibility to decide when and how to impose losses on a failing bank’s creditors.

Under the rules, which would come into effect by 2018, countries would be obliged to distribute losses up to the equivalent of 8 per cent of a bank’s liabilities, with some leeway thereafter.

Europe can now focus on building the next pillar of a project to unify the supervision and support of banks in the euro zone, known as “banking union.”

But thorny issues lie ahead, not least whether countries or a central European authority should have the final say in shutting or restructuring a bad bank.

The European Commission, the EU executive, is expected to unveil its proposal for a new agency to carry out this task of “executioner” as early as next week, officials said.

http://www.irishtimes.com/business/sectors/financial-services/eu-strikes-deal-to-push-cost-of-bank-failure-on-investors-1.1444621

The Council document is here: http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/137627.pdf

The main resolution measures would include:
– the sale of (part of a) business;
– establishment of a bridge institution (the temporary transfer of good bank assets to a publicly controlled entity);
– asset separation (the transfer of impaired assets to an asset management vehicle)
– bail-in measures (the imposition of losses, with an order of seniority, on shareholders and unsecured creditors).

Bail-in

The bail-in tool would enable resolution authorities to write down or convert into equity the claims of the shareholders and creditors of institutions which are failing or likely to fail. Under the Council's general approach agreed today, eligible deposits from natural persons and micro, small and medium-sized enterprises, as well as liabilities to the European Investment Bank, would have preference over the claims of ordinary unsecured, non-preferred creditors and depositors from large corporations. The deposit guarantee scheme, which would always step in for covered deposits (i.e. deposits below €100,000), would have a higher ranking than eligible deposits.

Exclusions

Certain types of liabilities would be permanently excluded from bail-in:
– covered deposits;
– secured liabilities including covered bonds;
– liabilities to employees of failing institutions, such as fixed salary and pension benefits;
– commercial claims relating to goods and services critical for the daily functioning of the institution;
– liabilities arising from a participation in payment systems which have a remaining maturity of less than seven days;
– inter-bank liabilities with an original maturity of less than seven days.

National resolution authorities would also have the power to exclude, or partially exclude, liabilities on a discretionary basis for the following reasons:
1) if they cannot be bailed in within a reasonable time;
2) to ensure continuity of critical functions;
3) to avoid contagion;
4) to avoid value destruction that would raise losses borne by other creditors.

The markets were, it seems, correct to see Cyprus as a watershed.

cordially,
Scofflaw

Same thing would happen if they had of left things alone

Scofflaw

Deleted User wrote: »

Same thing would happen if they had of left things alone

No, what would have happened in that case, in the absence of any agreed rules, is disorderly collapses and panicky scrambles as a result of nobody knowing what was likely to happen. The countries that best handled their banking crises were those which had a tested and publicly visible bank resolution process.

Like it or not, banks are not corner shops, which can be allowed to go under without public concern, and which would be almost immediately replaced.

Ireland still does not have a bank resolution process, and this EU-wide one will be the first time in our history we will ever have had one.

cordially,
Scofflaw

MOC88

Hmmmmm minimum of 8%... that would be the maximum also, I'd imagine.... and if the "bail-in" companies refuse to help what then?

Worztron

Who voted against the bank guarantee in 2008?

I heard Michael D. Higgins was one of 21 out of 166 that voted against it.

Who were the other 20?

View

Worztron wrote: »

Who voted against the bank guarantee in 2008?

I heard Michael D. Higgins was one of 21 out of 166 that voted against it.

Who were the other 20?

Labour had 20 seats after the 2007 election, so I presume they were all Labour TDs + 1 other (who though?)

Slydice

Scofflaw wrote: »

No, what would have happened in that case, in the absence of any agreed rules, is disorderly collapses and panicky scrambles as a result of nobody knowing what was likely to happen.

He didn't say no agreed rules. He said left things alone.

I presume he meant, hadn't bailed em out.

I think I read (maybe by McWilliams) that there was agreed rules for when banks go bust.

Something like everyone gets in a queue to get their money back with Depositors at the front.


a quick google gets this: http://www.davidmcwilliams.ie/2011/09/12/what-happens-when-contracts-cant-be-paid

Let’s say, for the sake of example, that the company folds and a receiver sells off the assets of the stricken company. At the outset, there are €500,000 of secured creditors, €400,000 of preferential creditors and €5,000,000 of unsecured creditors. The receiver comes in, sells everything for only €1 million. This €1 million is then divvied up.

From the €1,000,000, the secured creditor gets all his €500,000 back. Then there is only €500,000 left. The preferential creditor gets all his €400,000 back and this leaves only €100,000 to be divided among the €5,000,000 of unsecured creditors.

and

Where would Anglo bondholders come in your pecking order?

Scofflaw

Slydice wrote: »

He didn't say no agreed rules. He said left things alone.

I presume he meant, hadn't bailed em out.

I think I read (maybe by McWilliams) that there was agreed rules for when banks go bust.

Something like everyone gets in a queue to get their money back with Depositors at the front.


a quick google gets this: http://www.davidmcwilliams.ie/2011/09/12/what-happens-when-contracts-cant-be-paid
and

There was, and is, no Irish bank resolution mechanism. There are international norms, but there is no Irish legislation for the winding up of a bank. That's why all this ad hoc legislation has been created during the crisis.

In the absence of an established resolution mechanism, there is no certainty over who gets what when a bank is let collapse.

For example:

The next step in financial reform - a Banking Resolution Act

The absence of a special resolution regime (SRR) for the banking sector in Ireland is among the chief reasons why the banking problem continues to dog us both at home and on the international bond markets.

Such a regime has just been introduced in the UK during 2009 and in the US new legislation in the form of the Dodd-Frank Act has been passed. We could do well to follow that example.

A special resolution regime does not mean no recourse to the exchequer. It would, however, offer the authorities a statutory framework in which alternate actions to those taken in relation to, for example, Anglo thus far could be contemplated.

http://www.mazars.ie/Home/News/Latest-news/2010-News-Archive/The-next-step-in-financial-reform

cordially,
Scofflaw

Slydice

Scofflaw wrote: »

In the absence of an established resolution mechanism, there is no certainty over who gets what when a bank is let collapse.

Why? Back before these banks were bailed out, what made a bank (many in Ireland being shareholder controlled companies) any different from other (Irish shareholder controlled) companies?

Could they not go to the wall in the same way as any other company?