A weapon of wealth destruction: the bail-in!
Bank bail-ins – in which losses on bad debts are shared with senior creditors (including depositors) – have finally come to the Continent. They started in Cyprus. But now it’s happening in Austria. It’s the test-case of the European Union’s Bank Recovery and Resolution Directive (BRRD).
The Austrian Financial Market Authority issued steps over the weekend for the winding-up of Heta Asset Resolution AG. It included the following measures:
- A 100% bail-in for all subordinated liabilities
- A 53.98% bail-in, resulting in a 46.02% quota, for all eligible preferential liabilities
- The cancellation of all interest payments from 01.03.2015, when HETA was placed into resolution
Now, please keep in mind those measures don’t all directly affect depositors in other Austrian banks. It’s the process I want to bring your attention to. BRRD is the post-GFC method for containing the spread of financial panic. Bank creditors – which include savers – share the losses in a “bail-in”.
The event was a “proof of concept”. And it was momentous enough that the Austrian regulator felt compelled to comment. It wrote:
While the application of the new European recovery and resolution framework for banks is unchartered territory both in legal and practical terms, we are on target with the resolution of HETA and are also making satisfactory progress in relation to the realisation of its assets… The measures that have been prescribed… form the basic structure for an orderly resolution, and fully satisfy the aims of the European resolution regime – namely to guarantee financial market stability, to protect taxpayers and to bail-in creditors. Moreover, this package of measures also ensures the equal treatment of creditors. Orderly resolution is more advantageous than insolvency proceedings.
It’s true that the BRRD regime prevents tax payers from having to bail out bad banks. It’s also true that by mandating bail-ins, the people who will pay for the next bank crisis are bank creditors. That includes bond holders, shareholders, and – as far as I can tell – depositors (who are classified as unsecured creditors).
Now you may be thinking all of that is awful news for the EU banking sector. But Britain is not part of the EU’s banking system. Nothing to worry about. If that’s what you’re thinking, then to a certain extent, you’re right. It’s the EU’s problem, not the UK.
Except that the UK is, for now, a member of the EU. And the EU seems hell-bent on extending to its banking sector the same philosophy that dominates political union: more centralisation, more political control, less democracy, and enforcement of compliance with the EU agenda through control of the banking system.
Category: Economics