Hello bail-in – Goodbye bail-in
Some time ago, I wrote on the increasing complexity and opacity of bank capital standards, and mentioned the new TLAC and MREL frameworks, which effectively require banks to hold a certain amount of ‘bail-inable’ senior debt on their balance sheet in order to absorb losses if the institution fails. You may certainly have heard that the EU is full speed on the banking union thing and that everything is going to be marvellous.
Well it didn’t take long for the EU to undermine its own policies. Never underestimate politicians. In order to facilitate the implementation of the bail-in regime, Germany passed a law making all senior bondholders junior to depositors. Many people expected other countries to follow suit, but instead, France is working on a low to make senior bail-inable bondholders to become ‘junior-senior’, that is, to rank below all other senior bondholders and depositors but above junior bondholders in case of the bankruptcy of the firm. This doesn’t quite fit within the German framework. And it’s going to make it complicated when a cross-border multinational collapses.
And it continues, with Portuguese regulators actually cherry-picking which bondholders would suffer losses on the basis of ‘safeguarding financial stability’ and ‘based on public interest’ (see Bloomberg). Greece also avoided bailing in creditors when it benefited from its latest bailout. Meanwhile, Italian regulators aren’t happy because it is common in the country for savers to invest their money in retail bonds issued by banks.
Rating agencies confirmed that new rules might not end up applying to all investors equally, mostly due to political risk.
Clearly, the EU isn’t ready for anything close to a banking union. Cultures, practices and non-banking legal frameworks are too different to get ‘harmonised’ (at least in less than decades), as I pointed out elsewhere (see here). Despite the ECB taking over as single common regulator, local political discretion trumps rule application. When a bankruptcy occurs, it’s going to be necessary to disentangle the many layers of formal intertwined rules already in place combined with/modified by discretionary actions at various hierarchical levels. To say that it’s going to be a huge mess is an understatement.