Tag Archives: Bailin

Monte dei Paschi Bail-X

The Economist reports about plans for Monte dei Paschi’s future:

… retail investors in the bank’s junior bonds, many of them ordinary customers. European state-aid rules say that they should lose their money along with shareholders. Technically, they will. In fact, to preserve their savings and avoid a political outcry, they will be deemed to have been “mis-sold” the bonds: they will receive shares which will in turn be swapped for new, safer bonds.

Italy has to come up with a restructuring plan, likely to involve job losses and branch closures, for the commission’s approval. (The ECB must also certify the bank’s solvency.) Bosses’ pay will be capped at ten times the staff average. And Monte dei Paschi must sell its sofferenze, the worst category of non-performing exposures, which in March amounted to 24% of all its loans. A state guarantee will cover senior tranches of these securitised debts. Atlante 2, a fund backed by Italian financial institutions, and others are negotiating with the bank over more junior slices.

Single Resolution Board and Banco Popular Bailin

In the FT, Martin Arnold, Tobias Buck, and Rachel Sanderson discuss the significance of the Banco Popular bailin.

The Single Resolution Board was created at the start of 2015 as a pan-European authority for dealing with failing banks. Since then however, the institution has remained almost entirely untested. Now with Banco Popular it has shown its teeth at last. The SRB, chaired by Elke Koenig, acted swiftly after it was informed by the European Central Bank that Popular was “failing or likely to fail” on Tuesday. It imposed heavy losses on shareholders and junior bondholders before transferring Popular’s remaining equity to Santander for only €1. The move is an unprecedented step as it imposes losses for the first time on holders of alternative tier one (AT1) securities — the riskiest bonds in a bank’s capital structure that are designed to absorb losses in a crisis.

Private Sector Rescue for Italian Bank

In the FT, Rachel Sanderson and Martin Arnold report that the board of Monte dei Paschi is about to approve a recapitalization led by JPMorgan in order to avoid the alternative, a bailin according to European rules.

Other news sources reported that the European Commission had made it clear that it rejected the proposal by Italy’s prime minister (supported by the ECB president) to change the rules and let the Italian government finance the recapitalization. EU finance ministers and Angela Merkel had opposed the proposal as well.

This time, rules won.

The ECB and Ireland: Bailout But no Bail-In

Vincent Boland and Peter Spiegel suggest in the FT that the ECB coerced Ireland into applying for a bailout in 2010, based on letters recently released by the ECB. The ECB, in contrast, argues that the bailout was unavoidable anyway, and that the Irish Minister for Finance shared this view. In a Q&A section on its website the ECB writes:

While the ECB always acted within its remit and in line with rules established for the whole of the euro area, there are limits to the support that the Eurosystem can provide to banks in the Member States. … First, collateral has to be adequate; and second, counterparts have to be financially sound and solvent. The letter dated 15 October 2010 from the former ECB President recalled these rules and their implications for Ireland. … [Another letter dated 19 November 2010] explained the conditions under which further provisions of ELA to Irish financial institutions could be authorised. In his already public reply of 21 November 2010, the Irish Minister for Finance stated that he fully understood the concerns raised by the ECB Governing Council.

The ECB also addresses the question why it opposed the bail-in of bondholders in 2010:

As regards the possible bailing-in of senior debt in late 2010, it is important to recall the words of EU leaders in a European Union statement of 29 October 2010 and during the G20 meeting in South Korea on 12 November, according to which burden-sharing of senior debt would not be applied until mid-2013. … Furthermore, the necessary EU governance tools to address the bail-in of creditors, which were set out in the Bank Recovery and Resolution Directive (BRRD) and have been fully endorsed by the ECB, were not available in late 2010. … any potential burden-sharing of senior debt in the immediate aftermath would first and foremost have had negative spillover effects on the financial stability of Ireland, as well as on other European countries.



Conference on “Law and Economics” with Focus Session on “Bank Resolution” at the Study Center Gerzensee

Joint with CEPR, the Study Center Gerzensee organised a conference on law and economics. The program can be viewed here and papers can be downloaded from CEPR’s website. The focus session on bank resolution featured contributions by

  • Patrick Bolton and Jeffrey Gordon (paper)
  • Martin Hellwig (paper, slides)
  • Mathias Dewatripont (slides)
  • Gerard Hertig
  • Wolf-Georg Ringe (paper)
  • Paul Tucker (paper)

In his talk, Jeff Gordon explained how Dodd-Frank extends the FDIC’s resolution technology from the 1930s to “non-banks” that engage in banking business. Dodd-Frank establishes an “Orderly Liquidation Authority” and in title II a “Single Point of Entry” by putting a holding company (topco) into receivership. The objective is to minimise disruption costs for large institutions, to preserve the going-concern value of the company and to avoid collateral damage. Single point of entry also helps resolve cross-border issues. No comparable institutional framework is available in the EU. In the crisis, US authorities implemented ad-hoc alternatives to bankruptcy: Mergers (which require the approval of shareholders and therefore make it hard to wipe out the target’s shareholders) worked for Bear Stearns (JPMorgan Chase, Maiden Lane, Fed) but not for Lehman Brothers (Barclays, Fed) because the UK authorities refused to waive Barclays shareholder approval, fearing fiscal implications. Recapitalisation with third party funds (Fed) in the case of AIG also required shareholder approval and protected creditors and counter-party claims.

Patrick Bolton cautioned that the rules for the topco are still not clear and discussed alternatives to Dodd-Frank in the bankruptcy code. He emphasised the role of qualified financial contracts and debtor-in-possession interventions.

Martin Hellwig argued that the government rescue of Hypo Real Estate reflected the political will to help influential creditors rather than systemic importance. He questioned the viability of single-point-of-entry arrangements in cross-border resolution, pointing to lack of trust among national regulators. He questioned whether internationally active banks can ever be resolved in an efficient manner and asked whether, in that light, they are socially valuable.

Mathias Dewatripont warned that excessive emphasis on bail-in arrangements can undermine financial stability, for example by having the expectation of a small haircut applied to senior debt tranches trigger a run on all senior debt. To avoid such an outcome, he favoured a clearly identified seniority structure with a significant balance-sheet share of “bail-inable” liabilities. He questioned the usefulness of higher capital requirements, arguing that “prompt corrective action” is politically infeasible unless the equity ratio has fallen below a very low value, 2 percent say.

Wolf-Georg Ringe favoured holding-company structures with sufficient “bail-inable” debt.

Paul Tucker discussed potential problems with the holding-company/single-point-of-entry strategy, related to centralised operations (IT). He raised the issue of accountability and the potential lack thereof if companies are resolved by regulators rather than judges, and he wondered whether national regulators can commit to collaborate across borders if need be. He favoured “bail-inable” debt over equity because the former gives incentives to monitor without the incentive to speculate on the upside.

Gerard Hertig warned that regulatory incentives lead to bank mergers rather than resolution, in particular because authorities tend to be more lenient in crisis times. He argued that because of deposit insurance, resolution worked well in Japan until recently.

Patrick Bolton argued that cocos are badly designed as their triggers are too low and they refer to accounting equity. Instead, he favoured reverse convertible bonds that can be converted by the issuer.

Oliver Hart argued that resolution has the advantage over cocos that the management gets replaced.

Many panelists voiced scepticism towards narrow banking proposals. They feared that control over the money supply might turn into control over credit, referring to the discussion in the US during the 1930s.

IMF Policy Vis-a-vis Greece

Christoph Eisenring reports in the NZZ about a critical internal assessment of the IMF’s recent policy vis-a-vis Greece. The relaxation of the “medium term solvency” requirement for IMF lending in a situation of acute contagion risk should be reconsidered; contagion should be addressed with different instruments; debt should be restructured earlier than happened in the Greek case; and bail-ins should be favoured.