One day after the outrage over Eurogroup chief Jeroen Dijsselbloem’s statement that the Cyprus rescue plan would be implemented also to other eurozone economies, the European Commission confirms these plans. With a small differentiation: that insured deposits up to 100,000 euro will not be used for future bail-ins.
EU Commission: new law could include bail-in of uninsured deposits
“It might be possible for large uninsured depositors to be “bailed-in” as part of the future resolution of a bank under a new draft EU law, the European Commission said on Tuesday, but savers with less than €100,000 at a bank would not be hit.
“At no point is it possible to bail in depositors under €100,000, either now nor in the future,” said a spokeswoman for Michel Barnier, the European Commissioner in charge of financial regulation.
“In the Commission’s proposal, which is under discussion, it is not excluded that deposits over €100,000 could be instruments eligible for bail-in,” spokeswoman Chantal Hughes told a regular briefing. “It is a possibility.” (via Irish Indepentent and Greek Proto Thema)
Are insured deposits safe?
It is very interesting to read articles 90 and 99 of the European Commission on Directive of the European Parliament and the Council establishing a framework for the recovery and resolution of credit institutions and investment firms.
Article 99 deals with the role of Deposit Guarantee Schemes (DGS) in the resolution framework in case of banks liquidation. KTG understands what even the insured deposits are not secure:
“DGS may be called to contribute to resolution in two manners.
First, deposit guarantee schemes must contribute for the purpose of ensuring continuousaccess to covered deposits. Deposit Guarantee Schemes are currently established in all Member States in accordance with Directive 94/19/EC. They compensate retail depositors up to EUR100,000 in respect of unavailable deposits, before being subrogated to them in liquidation proceedings. By contrast, resolution avoids the unavailability of covered deposits, which is preferable from the depositor’s point ofview. It is therefore desirable that the DGS contributes for an amount equivalent to the losses that it would have had to bear in normal insolvency proceedings, as reflected in paragraph 1 of Article 99.In order to provide for sufficient funding, the ranking of deposit guarantee schemes in the hierarchy of claims is introduced, with DGS ranking pari passu with unsecured non-preferred claims. The DGScontribution must be made in cash in order to absorb the losses pertaining to covered deposits.Secondly, while Member States must at least use DGS for the purpose of providing cash toensure continuous access to covered deposits, they retain discretion as to how to fundresolution: they may decide to create financing arrangements separate from the DGS, or usetheir DGS also as financing arrangements under Article 91.Indeed, there are synergies between deposit guarantee schemes and resolution. When a resolution framework that limits contagion is in place, it reduces the number of bank failures, and therefore the likeliness of DGS pay-outs. The proposal therefore allows Member States to use DGS for resolutionfunding in order to reap economies of scale.Where the two arrangements are separate, the DGS is liable for the protection of covered depositors to the extent and in the conditions laid down in Article 99.”
(Full directive here, articles 90 & 99 in page 16)