Sonntag, 19.08.2018 02:11 Uhr

Bail in and bail out in the Eurozone Banks

Verantwortlicher Autor: Carlo Marino Rome, 02.10.2017, 12:50 Uhr
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Rome [ENA] Since January 1, 2016 in Italy and other eurozone countries the new bailout rules for banks in crisis have changed. The European financial markets have been transformed by The Banking Recovery and Resolution Directive (BRRD). Shareholders and investors have to take on the losses by themselves, not looking forward to a bail out by Governments and taxpayers. This is a principle that pertains to all regular companies

and now also to banks in the European Union. BRRD is a directive designed with the purpose to prevent future banking crisis from being a burden on taxpayers of the euro area member countries. With the adoption of the latest European legislation, there’s the passage from an external bail out mechanism, which provided for direct intervention by the state in the rescue plan of banks through the money of all taxpayers, to an internal instrument (bail in), which sees the bank's investors themselves paying for bankruptcy. It has two vital consequences that are essential. On one hand, when a bank is in trouble, there is a clear roadmap for how to deal with the losses.

In principle, everything can be in a bail-in regime, not only own capital, with the consequence that the present owner will cover the losses, but also major investors and eventually depositors, in a definite the ranking order. This indicates that in a resolution a bail-in can be operated without anyone being surprised or claiming that this was not foreseen. This means that there should be no room for anyone having reservations about or impeding the bail-in. Consequently, the new directive provides that in the event of serious financial difficulties for banks, the shareholders, bondholders and current accountants of the bank contribute to the recovering of the company in crisis.

Exception only for those customers of banks holding a deposit less than 100 thousand euros of depositors which is bailed in last and can also be refunded by national deposit insurance systems, within the applicable limits. For depositors and investors, this provides legal clarity and confidence. Depositors can prepare themselves for a high level of security by spreading their savings across different banks or making certain that the bank is safe and stable. The same applies to investors. They will be subject to a bail-in before depositors but in a designated order with different categories of capital.

This makes possible an efficient bail-in and at the same time offers to everyone a clear picture of the risks they are exposed to, giving the opportunity to balance the risks that are acceptable. On the other hand, the understanding that everything can be bailed in generates market discipline where everyone knows that you can lose your shares, your capital or your investments. This forces banks to finance themselves in a way that provides owners and investors with the security they want in order to invest in the bank. It is important to secure that all capital was in bail-in regime, and by that achieving legal clarity and a disciplined market.

The introduction of the so called Total-Loss Absorbing Capacity in European legislation and of the Bank Recovery and Resolution Directive as well as the SRMR (Single Resolution Mechanism Regulation) is based upon international rules for global systemically important banks. Simultaneously, one has to underline that the special subordinated capital foreseen for loss absorption is not meant to avoid the fact that all capital, all debt, can be exposed to a bail-in, but rather that the subordinated debt is there to facilitate a quick and constant process of resolution, not limit the debt that is suitable for a bail-in.

For this reason, Total-Loss Absorbing Capacity shall be put into operation in line with G20 rules but not impose additional requirements beyond that, in order to pave the way for increased investments and clarify the risks for an investor or depositor in a bank. This approach is also important in order to achieve a smooth playing field for European banks in the global competition. Last but not least, the rules concerning TLAC and MREL must be designed in a way that they do not penalize banks for increasing their level of capital or for maintaining a high level. Requirements for MREL must be designed so that a bank with a high levels of own capital meets the same requirements on MREL as an equivalent bank with a lower level of capital.

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