Monday, March 25, 2013

The Eurozone Introduces "Depositor Discipline"

"If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'. If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders."
---Jeroen Dijsselbloem, Dutch finance minister

"In a normal market economy an investor always has a risk of losing money. That's why I think it's fair and right, and also part of a normal market economy, that owners of a bank, investors, and biggest depositors - who can be seen as investors - take their own responsibility, in one way or another."
-- Jyrki Katainen, Finnish prime minister

So the Dutchman with the unspellable name, who is currently the head of the committee of eurozone finance ministers, has announced that no bank in the eurozone, no matter how important,  is TBTF. How this must warm the hearts of the Righteous. “We told those Levantines: No more of our good clean Protestant money will go toward paying for your sinful ways. Let your dirty depositors pay.” You know how good it feels for them to say that.

It has been interesting watching the northerners writhe in agony as they have had to write checks to the peripherals. Every time they have rescued a bankrupt bank, they have said “This is the last time: from now on, creditors and depositors will contribute.” But until now they never actually allowed that to happen. Now, not only do we see the junior creditors of Bankia being hit, we also see depositors in the big Cypriot banks being whacked. A breakthrough.

It is easy to destroy someone else’s economy. The IMF has done it a number of times. But when it comes to one’s own economy, one is more cautious. The northerners talk the talk when it isn’t their banks, but they have never walked the walk themselves. They bailed out all of their banks, big and small, during the crisis. In fact, they have been bailing out banks for years as a matter of routine.

The Germans have been the worst. They have rescued the landesbanks so many times that even the French got angry. WestLB? I don’t have enough fingers to count the number of its bailouts. WestLB has been magical in the way that every mark or euro poured into it has vaporized into the atmosphere, again and again. Where did it all go?

The French don’t let any bank fail, not even nonsystemic dinosaurs like Credit Foncier. They run a convoy system that’s as tight as Japan’s. Large banks don’t fail in Europe, and small banks almost never do either.

So now the north wants to introduce “depositor discipline”. Depositors are now “investors” who bear responsibility for investigating the soundness (and morals) of the bank and the country in which they “invest” their deposits. Well, you can bet that from now on they will do just that. That means two things: (1) big depositors will look at the sovereign credit ratings of the country where they have deposits; and (2) they will look at the ratings of the banks where they deposit their money.

And now, since eurozone banks are no longer TBTF, those bank ratings are going to go down. This is what Moody’s has to say on the subject: “The authorities’ apparent willingness to accept the risk of contagion suggests that the landscape is shifting to the detriment of senior bank creditors in support scenarios”. So institutional depositors will now have to make sure that their money is placed with highly-rated banks in highly-rated countries. Second-class will no longer suffice. That is, unless they are prepared to “invest” in the resolution of the banks where they deposit their money. The eurozone is now a depositor’s minefield.

It just so happens that both France and Germany still have some weak banks which could serve as guinea pigs for this new policy. Germany has some dodgy landesbanks (Bayern, HSH Nordbanken, Bremer) which would be fascinating to see resolved. France also has some interesting names: Dexia, Credit Foncier, Credit Immobilier, Natixis, BPCE. Will these be wound up at a loss to their senior bondholders and depositors? So far, no bank issuer of pfandbriefe has ever been allowed to fail. Will that change? Will the legal robustness of pfandbriefe finally get tested in a bank failure? This new policy opens so many analytical doors.

Will we, as avid spectators, get to see the spectacle of large French and German banks defaulting on their bonds and deposits? Sadly, no. That’s only for the Levantines.

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