28 March 2013

Graham Bishop's Blog: Dijsselbloem 'shocks' the banking commentariat about Cyprus...

It is astonishing that financial commentators are up in arms about the idea of uninsured depositors at banks taking losses. They seem to have forgotten the basic tenets of capitalism: if management makes a hash of the business, creditors lose some of their money.

In all national insolvency regimes, there is an order of priority laid down for the different classes of creditors - unsecured creditors such as depositors rank well down the list of protected classes. Banks are not some sort of modern temple to be venerated and preserved at any cost to the public. They are ordinary commercial entities but with special characteristics of 'public good' that warrant some special insolvency arrangements.

Since the G20 decided - in November 2008 - on a radical overhaul of financial regulations, politicians have been exceptionally clear that taxpayers should not support banks – except perhaps temporarily and only in the most extreme situations. Responding to these repeated political demands, the European Commission published – in June 2012 so nearly a year ago - a proposal for a Directive “establishing a framework for the recovery and resolution of credit institutions and investment firms”.

Regrettably, the commentariat seems to have overlooked the text of Article 38 (Scope of bail-in tool) paragraphs 1 and 2:

1. Member States shall ensure that the bail-in tool may be applied to all liabilities of an institution that are not excluded from the scope of that tool pursuant to paragraph 2.

2. Resolution authorities shall not exercise the write down and conversion powers in relation to the following liabilities:

(a) deposits that are guaranteed in accordance with Directive 94/19/EC [This means the €100k protected by the Deposit Guarantee Schemes]

Bloomberg now reports that there is pressure for an acceleration of the implementation date of this Directive to 2015. However, it has yet to be agreed by the co-legislators and there are legitimate arguments about the realism of some of the deadlines for the resolution mechanism. But the direction of political travel is crystal clear. It has been clear for a year explicitly, and four years implicitly. There will indeed be profound implications from this new approach.

The invisible hand wrote upon the wall at the Feast of Belshazzar. Daniel translated this (5:25-28) “And this is the writing that was written, Mene, Mene, Tekel, Upharsin. This is the interpretation of the thing: Mene; God hath numbered thy kingdom, and finished it. Tekel; Thou art weighed in the balances, and art found wanting. Peres; Thy kingdom is divided, and given to the Medes and Persians.”

To translate into modern-speak: The banking system has been examined by several High Level Groups (most particularly those led by De Larosière and Liikanen) and found seriously wanting. So there must be a separation of powers and this week’s Green Paper on Long-Term Investing foreshadows the nature of the division that will happen – probably during the term of the next Parliament and Commission.

© Graham Bishop