Cyprus deal points way to future bank rescues

EU is on course towards legislation that could systematically penalise depositors.

Depositors in the firing line

A wake-up call for the eurozone

The bail-out of Cyprus, with its levy of an estimated 40% on large deposit-holders, confirms a new path for European Union bank rescues. Despite official insistence that the Cyprus deal is only a one-off, the ‘bailing-in’ of customers holding large deposits looks set to become a consistent feature of the EU response to troubled banks.

The revised assistance programme, drawn up in the early hours of Monday morning (25 March), marks the first time that a eurozone sovereign bail-out has imposed significant losses on deposit-holders, taking money from accounts above €100,000.

But the EU is already on course towards legislation that could systematically penalise depositors. Last June, the European Commission’s draft regulation governing bank recovery and resolution explicitly envisaged the possibility. “The bail-in tool will give resolution authorities the power to write down the claims of unsecured creditors of a failing institution”, said the proposal.

“In order to ensure that the bail-in tool is effective and achieves its objectives, it is desirable that it can be applied to as wide a range of the unsecured liabilities of a failing institution as possible. For reasons of public policy and effective resolution, the bail-in tool should not apply to those deposits that are protected under…deposit-guarantee schemes.”

Stockmarkets initially reacted negatively on Monday to suggestions from Jeroen Dijsselbloem, the Dutch finance minister who leads the Eurogroup of the 17 eurozone finance ministers, that the Cypriot method could be used as a model for future bank rescues.

Dijsselbloem had also speculated that the use of bail-ins could even make it unnecessary to put into effect the recent agreement allowing the European Stability Mechanism, the eurozone’s rescue fund, to be used for direct bank recapitalisation.

But markets yesterday appeared to absorb the message with equanimity, as a chorus of support for the Cyprus deal grew.

There was wide backing from the European Parliament, with welcomes immediately issued by Martin Schulz, the president of the Parliament, and the leaders of the European People’s Party group – the largest in the Parliament – and the ALDE liberal group, and Gunnar Hökmark, a Swedish centre-right MEP who is leading the Parliament’s work on the draft legislation on bank resolution.

Sharon Bowles, a British Liberal MEP who chairs the Parliament’s economic and monetary affairs committee, also endorsed the principle. She said that Cyprus’s bail-out was rightly “based on a proper hierarchy of losses and on the acceptance that a bank can fail”.

James Watson, chief economist at BusinessEurope, said that there were “no easy options” when it came to rescuing banks but that it was sensible that those whose stood to gain from risk-taking also took losses in bad times. “The rationale is that larger depositors should have a greater ability to make a judgement on the risk profile of any bank,” he said. This in turn would put “market pressure” on banks to step away from excessive risk-taking.

Officials remain hesitant over confirming any systematic character to the shift in approach. Dijsselbloem released a statement insisting that rescues were “tailor-made to the situation of the country concerned and no models or templates are used”.

The European Central Bank yesterday also distanced itself from Dijsselbloem’s remarks:  “The Cyprus experience is not a model for the rest of Europe,” Benoît Coeuré, a member of the ECB’s executive board, told French radio.

The Cypriot rescue was “unique” and not necessarily a “perfect model”, said a spokeswoman for Michel Barnier, the European commissioner for the internal market, who is in charge of bank legislation. However, speaking yesterday, she added: “It is not excluded that deposits over €100,000 could be instruments available for bail-in.” All deposits under €100,000 would remain protected under the EU’s deposit guarantee scheme, she underlined.

In recognition of the obvious merit of avoiding taxpayers picking up the bill when banks fail, as they had to in the bail-outs of Greece, Ireland and Portugal, she went on: “We want to find ourselves in the situation where taxpayers stop having to pay for errors made by banks.”

MEPs will have to reach a compromise agreement with the EU’s Council of Ministers before the bank-resolution legislation can come into effect. A vote on the new rules in the Parliament’s economic and monetary affairs committee is scheduled for 24 April.

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