08 May 2013

Bloomberg: EU sees shocks without bank depositor preference rule

European Union deposit insurance funds would be vulnerable to "huge shocks" unless depositors receive preferred treatment over other unsecured creditors, a study on proposed rules for handling failing banks showed.

The EU is weighing whether depositors should be paid back ahead of other unsecured creditors in new rules on bank resolution. If clear preference isn’t given to any depositors, national funds would stand in line with uninsured depositors, senior bondholders and other unsecured creditors to divide up a failed bank’s assets and share in absorbing losses.

All EU nations are required to insure bank accounts with €100,000 or less, a guarantee that was called into question by euro area deliberations on a bailout for Cyprus. The €10 billion Cypriot agreement ultimately spared insured depositors, while imposing losses on uninsured depositors, underscoring the need for new EU rules on who suffers when a bank can’t meet all its obligations.

If the new law gives preference to insured and uninsured deposits, then bondholders and other unsecured creditors would face losses of about 80 per cent. The EU study says this could drive up funding costs while also predicting that the benefits of a clear hierarchy would outweigh any negative impact.

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