April 11, 2013
While every European leader, banker, street-sweeper has made a point to use the phrase “Cyprus was not a template” in the last few weeks since D-Boom dropped his tape-bomb, it appears that in reality plans continue to push ahead to indeed ‘legalize’ these confiscations. As Reuters reports, European Union ministers will consider a proposal this week to impose losses on short-term interbank deposits of lenders. The proposal is part of wider talks to consider when depositors should be bailed-in. Of course, it makes sense that banks should ‘not’ get special treatment for their overnight lending operations to one another, but the EU leaders want to ensure that these ‘sacred’ deposits do not escape confiscation, “while it is acknowledged that bailing in interbank liabilities may carry certain risks; on balance, it is preferable… that these liabilities are not excluded from bail-in”. Of course, this will worry the ECB as they have worked so hard to unfreeze the interbank lending market post-crisis (with their direct backstops and intermediation). So while there is no template, and Cyprus is unique, it appears the new ‘resolution’ laws provide a clear plan (not template) for reaching all the way down the capital structure just as they did in Cyprus (and is legally correct from a pari passu basis).
European Union ministers will consider a proposal this week to impose losses on interbank deposits of lenders in dire financial trouble as they shape a draft EU law introducing powers that would also penalize those with big savings.
Such an idea, should ministers back it, could further rattle the confidence of lenders, already nervous about draft legislation to determine who alongside shareholders should suffer losses when a bank gets into trouble.
The talks follow the recent decision to impose heavy losses on some depositors in Cyprus, in return for an international bailout. That set a precedent, which is likely to be mirrored in these EU rules, making losses for large uninsured savers a permanent feature of future banking crises.
ECB President Mario Draghi recently cautioned that Cyprus’s bailout was “no template”, in a bid to ease market fears that bank deposits would in future be fair game for international lenders supporting struggling euro zone countries.
In a document prepared by government officials in Ireland, which as holder of the rotating EU presidency will chair the ministers’ gathering, they write that interbank deposits of less than one month should also be penalized.
Customer bank deposits of up to 100,000 euros would remain protected under an existing EU law and the latest proposals touch on sums above this threshold.
“While it is acknowledged that bailing in interbank liabilities may carry certain risks,” officials write in the document, seen by Reuters, “on balance, it is preferable … that these liabilities are not excluded from bail-in”.
Such a suggestion will dismay many officials, who witnessed a freeze in interbank lending that the European Central Bank is still struggling to unblock despite having provided more than one trillion euros of cheap funds.
Although some policymakers have sought to portray Cyprus and the losses suffered by depositors at two of its banks as a one-off, many experts believe it marks a dramatic change in tack in how Europe deals with troubled banks, to spare taxpayers who have been on the hook for previous bailouts.
This article was posted: Thursday, April 11, 2013 at 4:20 am