Brussels, 02/04/2013 (Agence Europe) - Four member states, Germany, Finland, the Netherlands and Denmark, have gone on the offensive together to demand that the bail-in provisions in the draft directive on bank recovery and resolution should be brought forward to 2015 to cut the cost to taxpayers of bailing out banks. They made the demands at the end of March, in the midst of the Cypriot bailout talks.
“There is a considerable risk that, in the absence of this source of financing, resolution as a whole would not be a workable option without significant public support… For this reason, the implementation of the bail-in instrument should be compulsory from the beginning of the application of the Bank Recovery and Resolution Directive (BRRD),” argue the four countries in a joint document that this newsletter has seen. The European Summit wants agreement to be reached on the BRRD by June so that it can come into force in 2015.
Gunnar Hökmark (EPP, Sweden), European Parliament rapporteur on the draft BRRD, is unconvinced, and has tweeted that “recovery and resolution should come into force in 2015 with bail-in in 2018, as proposed. Markets and investors need time to adjust.' His draft report is due to be adopted on Wednesday 24 April by the European Parliament's Economic and Monetary Affairs Committee.
The four northern European countries admit that “concerns regarding an increase in funding costs for credit institutions (banks, Ed.) due to the bail-in tool are understandable, but might be overestimated. There are good arguments and evidence that bail-in has to a considerable extent been priced in already. Since the beginning of the discussions on a crisis management framework and the adoption of the FSB Key Elements of Effective Resolution Regimes, and at the latest after the publication of the proposal for the BRRD, markets have been aware of bail-in being an essential element of a future resolution regime. Therefore it is highly likely that prices of short-term bank funding already include a risk premium for potential bail-in.
Vicious circle. The four countries argue that “the bail-in tool is an essential element in helping break the negative feedback loop ('vicious circle') between bank risk and sovereign risk, to remove the implicit state guarantee from the banking sector and to prevent the build-up of new risk. Furthermore, the bail-in tool helps preserve the public resources of member states and, as far as eurozone banks are concerned, the resources of the European Stability Mechanism, thus limiting the potential need for using possible backstop mechanisms for the coming single European resolution mechanism (draft legislation on this is due in the summer)... We strongly believe that making all tools in the directive available by 2015 will allow resolution authorities to safeguard taxpayers' money more effectively with immediate positive consequences for the fiscal situation of all member states.'
Bail-ins help recapitalise banks by reducing the value of their shares, by cutting the banks' debt (the hierarchy of investors) or turning debt into shares. The countries say banks will be asked to issue a new type of convertible share. The four nations want this regime to be introduced on a massive scale and be fully operational in 2018. The question of a minimum holding of convertible debt can be introduced gradually, they say in a supporting document suggesting a three-year phase-in, independently from the entry into force of the bail-in mechanisms. (MB/transl.fl)