“We agree with Mr Dijsselbloems comment that “where you take on the risks, you must deal with them”. We hope that the decisions taken in the Cyprus bank deal will be reflected in the EU’s coming Bank Recovery and Resolution (BRR) legislation and become the rule for managing bank crises in Europe,” said Finance Watch Secretary General Thierry Philipponnat.
Finance Watch warmly welcomes the decisions to honour deposit guarantees for all deposits up to EUR 100,000 and to bail in both junior and senior bondholders of Laiki Bank, which is a first in the management of a bank crisis in a Eurozone country.
“These two elements are essential for public confidence in banks and will help to protect the public from paying for the mistakes of finance professionals. It is in all EU citizens’ interest that these are not dismissed as ‘one-off’ or ‘special case’ measures,” said Mr Philipponnat.
The bail-in of senior bondholders restores the idea of creditor hierarchy, in which investors are obliged to bear losses in the correct order in the event of bank insolvency, instead of transferring them to taxpayers.
The principles of creditor hierarchy and respect for depositor guarantees should be implemented fully in the EU’s proposed BRR regime and applied to all EU banks, regardless of size. A situation where bank resolution rules are applied to banks that are “too small to bail”, as in Cyprus, but not to banks elsewhere in the EU that are “too big to fail” would be intolerable for taxpayers and the economy.
“There is no public benefit in continuing to shield too-big-to-fail banks from market discipline,” said Mr Philipponnat.
A proper bail-in regime would have the natural effect of bringing much-needed market discipline to the bank wholesale funding markets as creditors will have to re-assess the credit quality of the banks they lend to.
In addition to bail-in, the EU’s Banking Union plans, of which BRR is a part, must be underpinned by reforms that address “too big to fail” head on. First among these are the structural reforms proposed in the Liikanen Report to reduce the public funding subsidy of banks deemed to enjoy an implicit state guarantee. The current industry lobbying to undermine the Liikanen proposals must be viewed against the very real risk that Banking Union without structural reform of banks will only cushion the effects of bank failure and so lead to a large increase in moral hazard in the EU’s banking system.
If bail-in is not applied across the board, this effect will be even worse, in particular in the European context of a generally over-sized and highly inter-connected banking sector.
“European citizens have suffered enough from bank bailouts. What they need is a coherent set of bank reforms that tie risk and reward together, where they belong. Cyprus is a strong first step in that direction, it must not be the last,” said Mr Philipponnat.
* Eurogroup president Jeroen Dijsselbloem said in an interview on 25 March, published in the Financial Times: “If we want to have a healthy, sound financial sector, the only way is to say: ‘Look, there where you take on the risks, you must deal with them. And if you can’t deal with them, you shouldn’t have taken them on and the consequence may be that it’s end of story.’ That is an approach that I think we should, now that we’re out of the heat of the crisis, consequently take.”
The Eurogroup subsequently issued a statement saying: “Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday. Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.”
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NOTES FOR EDITORS
The Liikanen report on the structure of the European banking industry was published 2 October 2012 and a legislative proposal is expected in Q3 2013
The European Commission outlined a vision for banking union, covering the single rulebook, common deposit protection and a single bank resolution mechanism on 12 September 2012.
The Commission’s legislative proposal for a Bank Recovery and Resolution framework was published 6 June 2012.
FINANCE WATCH LINKS
Press release “Cyprus bank proposals underline urgent need for reforms to create a sustainable banking system”, 19 March 2013
Report on the EU’s Bank Recovery and Resolution proposal, March 2013
Response to the Liikanen report, 14 November 2012
Presentation, Why structural bank reform is essential for Banking Union to succeed, 29 October 2012