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Cyprus bank proposals underline urgent need for reforms to create a sustainable banking system

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Brussels, 19 March 2013 – Public interest association Finance Watch, which has published a report on the EU’s Bank Recovery and Resolution proposals, said today that events in Cyprus underline the urgent need for reforms to create a more sustainable banking system.

As the proposal currently stands, the majority of international banks and institutional investors who lent money to Cypriot banks and government will not suffer losses, and large mainly non-Cypriot depositors will suffer only limited losses, despite the fact that they benefited from no guarantee above €100,000. But private individuals who deposited their savings in Cyprus’s banks will suffer losses, despite being promised a State-backed deposit guarantee.

Thierry Philipponnat, Secretary General of Finance Watch, said:

“Making ordinary citizens pay for the mistakes of professional financiers and violating the spirit, if not the letter, of the regulation protecting deposits is not the way for EU leaders to solve a financial crisis.”

“Policy makers must honour deposit guarantees or risk undermining public trust in the banking system.”

In this context, Finance Watch urges European legislators to ensure that their proposals on Bank Recovery and Resolution (BRR) are strong in design and application.

Finance Watch published a report on the BRR proposals yesterday.

Duncan Lindo, senior policy analyst at Finance Watch and author of the report, said:

“Prevention is better than cure. Recovery and resolution planning, together with structural and other reforms, should be used to address too-big-to-fail, too-complex-to-fail and too-interconnected-to-fail banks before crisis strikes. As we are seeing in Cyprus, allowing banks that cannot fail or be resolved poses a threat to the entire financial system and therefore to the whole economy of a country.”

“Bail-in should be broad and systematic and respect the creditor hierarchy. This is critical to protecting taxpayers from shouldering the burden of private creditors. All and any exemptions to bail-in will distort activity, encourage bubbles in the exempted liabilities and so undermine the effectiveness of the bail-in mechanism. As we are seeing in Cyprus, ad hoc deviations from these clear principals spread uncertainty and make restoring confidence in Europe’s banks even harder.”

Thierry Philipponnat said:

“We see the “financial stability” argument used all the time against the bail-in of creditors but this is a fundamental perversion of the system: what is the added value of a banker’s job if he or she has the certainty of getting their money back in all circumstances? If there is no risk in lending, money gets lent to all the “wrong” destinations.”

“This way of operating is not only unsustainable but politically and morally unacceptable. Future regulation, in particular the BRR, must absolutely tackle this issue or we will not put finance back to where it belongs: serving the economy and society.”

END

For further information, please contact:

Greg Ford, head of communications, on +44 7703 219 222 or greg.ford@finance-watch.org

Charlotte Geiger, communications officer, on +32.2.401.8741 or charlotte.geiger@finance-watch.org

NOTES FOR EDITORS

The European Commission’s proposal on Bank Recovery and Resolution was published on 6 June 2012. The proposed framework sets out the necessary steps and powers to ensure that bank failures across the EU are managed in a way which avoids financial instability and minimises costs for taxpayers. The European Parliament’s rapporteur on the proposal is Gunnar Hokmark (EPP, Sweden). A vote in ECON was initially scheduled for 20 March 2013 but has been moved to 27 March 2013 or later. A plenary vote is currently scheduled for 10 September 2013. In the Council, attaché level discussions continue on issues including home-host, bail-in, deposit guarantee and resolution fund. Further details can be found on the EC’s Crisis Management webpage at: http://ec.europa.eu/internal_market/bank/crisis_management/index_en.htm

Structural reforms to address too-big-to-fail have been proposed by the EC’s High-level Expert Group on possible reforms to the structure of the EU banking sector, chaired by Erkki Liikanen, which presented its final report to the Commission on 2 October 2012. The EC is expected to present a legislative proposal in the summer or autumn, while the European Parliament is working on a non-legislative report (rapporteur Arlene McCarthy, S&D, UK). A vote in ECON is scheduled for 28 May 2013 with a vote in Plenary at the beginning of July. The Liikanen report can be downloaded from: http://ec.europa.eu/internal_market/bank/group_of_experts/index_en.htm#High-level_Expert_Group

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