(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Neil Unmack
LONDON, April 18 (Reuters Breakingviews) - Who should lose
money when banks fail? Talk of making deposits senior to
bondholders might reassure savers rattled by losses in the
Cyprus bailout, and avoid bank runs. But it could lead to
unhealthy arbitrage between loans and deposits. Vigilance is
needed, and lots of “bail-in-able” capital.
Banks in Cyprus had too little capital to support too many
deposits. But the precedent may create anxiety among large
depositors elsewhere, whenever a bank gets into trouble. If
nothing were done, bank runs could become more frequent.
European lawmakers want to prevent that.
One option is to refine the hierarchy of losses when banks
fail. Insured deposits are already excluded from bail-in. The
next step might be to rank uninsured deposits, accounts with
more than 100,000 euros, above senior debt, loosely mimicking
the U.S. practice.
That’s fair, since the senior unsecured bondholders are paid
to take credit risk, while depositors aren’t. However, money
that used to go into unsecured bonds could now go into long-term
funding instruments that look like senior debt, but rank like
uninsured deposits. Weak banks may be more heavily incentivised
to borrow through secured debt, such as covered bonds, which are
also exempted from bail-in.
Moreover, the amount of senior debt left to absorb losses is
already shrinking, as banks borrowed more heavily during the
crisis from deposits or central banks. Much of it will mature
before 2015, the earliest the bail-in regime would be
Such arbitrages should be a zero sum game. The more banks
issue of higher-ranking or secured debt, the higher the return
investors in senior unsecured bonds should demand, as every euro
of protected or preferential debt means higher losses in a
default. But history suggests that banks will not volunteer to
be cautious and that relying on markets to discipline banks is
National regulators will have to decide the minimum amount
of “bail-in-able” debt banks must hold. Unless they provide
enough, they may once again be faced with the choice of burning
depositors, or bailing them out. Depositors should not assume
Cyprus is a one-off.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- European lawmakers are considering amending a draft
European law on bank failures to provide greater protection to
holders of uninsured deposits, Bloomberg reported on April 9.
The move follows comments by European Central Bank president
Mario Draghi on April 4, highlighting the need for a
“distinction” between senior bondholders and uninsured
depositors in European bail-in regimes.
- “The [U.S.] Federal Deposit Insurance Corporation makes an
explicit distinction between uninsured depositors which, in
general, are not touched, and bondholders”, Draghi said at a
press conference. “I think that the same distinction should be
present in the European Commission’s draft directive. I think
this is another lesson we can draw from Cyprus.”
- Uninsured depositors in Bank of Cyprus BOC.CY and Laiki
CPBC.CY will be forced to take losses under the country’s 10
billion euro bailout.
- For previous columns by the author, Reuters customers can
click on [UNMACK/]
(Editing by Edward Hadas and Sarah Bailey)
Keywords: BREAKINGVIEWS BANKS/BAILOUTS/
(C) Reuters 2012. All rights reserved. Republication or redistribution of
Reuters content, including by caching, framing, or similar means, is
expressly prohibited without the prior written consent of Reuters. Reuters
and the Reuters sphere logo are registered trademarks and trademarks of
the Reuters group of companies around the world.