Contributors-the saviors: how does the bail-in in the US and Europe


After the collapse of

The idea to shift the burden of rescuing the near-bankruptcy of banks from the state to their creditors arose in 2009, when experts began to study the catastrophic consequences of the incident a year before the bankruptcy of a major U.S. Bank Lehman Brothers.

Then began seriously to analyse the mechanism of bail-in, which is a procedure in which to rescue troubled banks are forcibly involved bondholders and depositors. In other words, the claims of creditors are converted into subordinated debt (payments on such loans are after payments on all other debts) or authorized capital to eliminate the resulting holes in it. If placed in a Bank Deposit exceeds the amount covered by the state Deposit insurance system, it is subject to a “haircut”, i.e. the authorities forcibly changing the “surplus deposits” on the stock. Thus, the creditors become shareholders of the Bank and get the opportunity after several years of financial rehabilitation of the Bank to recover their money.

As he told one of the first who described this scheme Deputy CEO of Credit Swiss, Wilson Ervin, a mechanism bail-in would not be possible without the support of the leadership of Central banks and of the head created by the “Big twenty” in 2009 the financial stability Board (FSB) Mark Carney.

In 2011, the FSB together with the Basel Committee on banking supervision issued new “standards for the restructuring and orderly liquidation of the financial institutions in case of their insolvency (bankruptcy)”. Under those rules, national governments must prevent the use of crisis to save banks and companies the taxpayers ‘ money and to protect the interests of small and medium investors. At the same time a liability must be imposed on shareholders and major creditors — the debt should be converted into equity. This mechanism is internal foreclosure — bail-in.

At the end of last year, the FSB has developed a policy for 30 of the world’s largest financial institutions. They by 2019 should create a safety cushion that can absorb losses (Total Loss-Absorbing Capacity, TLAC): it tools and obligations that in case of threat of bankruptcy can be easily converted into equity. The size should be 16% of assets, weighted by risk, by 2022, “safety cushion” is expected to grow to 18%.

Two approaches

USA insured against a repetition of the collapse of Lehman Brothers by adoption in 2010 of the “Dodd — Frank”, which were spelled out new rules for financial rehabilitation of credit institutions. According to them, the Federal Corporation on insurance of Bank contributions (FDIC) has received the right, taking the Bank under his control, to transfer the activities of the new organization, or even eliminate, the losses “to the extent necessary” are subject to distribution between shareholders and creditors. Plans for “orderly liquidation” of financial institutions, eliminating the occurrence of systemic risks for the global financial system, needs to be spelled out by financial institutions — these plans, known as “wills”, are forwarded to the FDIC. Directly the rules of the bail-in were formulated by the American financial regulators in the period 2013-2015.

In the European Union the mechanism of bail-in is effective from 1 January 2016. According to the Directive on the restructuring and bankruptcy of banks, which was approved in April 2014, the burden of rescuing the credit institutions must be passed on to the shareholders and creditors of financial organizations. The mechanism of bail-in will be primarily involved in relation to banks and large investment firms that accept deposits from the public.

According to provided document the procedure first fully written off liabilities to shareholders (capital), then capital will be converted obligations to the bondholders and, finally, large deposits of over Euro 100 thousand in Deposits for a smaller amount must remain intact, as they are guaranteed by the state. The Directive also establishes that the authorities can connect to Bank restructuring only after the participation in his salvation will take its shareholders and creditors. Taxpayers ‘ money to rescue the Bank can be allocated only once at the expense of the creditors will be paid 8% of the Bank’s liabilities. According to European Commission released a clarification to the Directive, this “comprehensive tool” convert debt implies a “minimal charge to taxpayers.”

At the same time, the Directive established a mechanism of “private recreation”, which implies the division of financial institutions on Bank two, the “good” and “bad”. The first plays the role of sanator, second, the “problem” Bank is subject to liquidation. Obligations of creditors of troubled banks can be left in the liquidated Bank or transferred to a new while reducing the amount of their claims or conversion of their funds in equity.

The Cyprus “haircut” and Greek banks

In March 2013, under the reorganization of the Cypriot financial system of the country, Bank of Cyprus absorbed its nearest rival, Cyprus Popular Bank (Laiki) and was recapitalized through the conversion of deposits into shares. 21 thousand clients of Bank, whose deposits exceed €100 thousand, became owners 81,4% stake in the Bank after 47.5 percent of their uninsured savings were converted into equity at a rate of €1 per share. According to The Wall Street Journal, about half of all deposits in the Bank of Cyprus belonged to non-residents of the EU. Among depositors, according to the newspaper, there were a lot of Russians, whose Bank was popular due to the simple procedure of opening of accounts and non-strict requirements for documents, including the disclosure of beneficiaries.

At the end of October 2015, the European Central Bank (ECB) presented the results of stress tests banks in Greece. Tests have shown that under adverse scenarios the four largest financial institutions (Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank) will require a total of €14.4 billion After the country’s Parliament approved a draft law on the recapitalization of Greek banks, which were supposed to be completed by the end of the year.

Two months earlier, the financial authorities of the Eurozone made clear that bondholders of Greek banks will likely have to accept some loss before running the program help. In mid-October 2015 Bloomberg with reference to sources reported that the systemically important Greek banks deal with the creditors on the exchange of their bonds for bonds that are convertible into shares, if the price of the latter reaches a certain level (so-called contingent convertible securities or Cocos).

In mid-November, Alpha Bank and Eurobank Ergasias announced that they will be able to attract enough money from investors to eliminate the hole in the capital without government help, and the latter, in turn, reached an agreement with creditors to recapitalize the two remaining systemic banks — National Bank of Greece and Piraeus Bank. Alpha Bank said that he has enough money to eliminate the hole in its capital with €2.6 billion — €1,55 billion the Bank will provide institutional investors and €1.01 billion he will receive from the conversion of bonds into shares. Eurobank announced on attracting investors from around €2 billion through sale of shares and funds received from conversion of bonds into shares.

National Bank of Greece and Piraeus Bank, which required recapitalisation in the amount of €4.6 billion and €4,93 billion, respectively, in turn, received requests from investors to buy shares of banks with more than a 90% discount to the price at which it is then traded securities of financial institutions. In the end, National Bank of Greece was attracted by the conversion of bonds into shares, the sale of shares to international investors, as well as other measures approved by the ECB, €1.28 billion and saved €300 million by selling shares to local investors, wrote Reuters. From the conversion of debt instruments into ordinary shares the Bank received €308 million Remaining funds required for recapitalization of National Bank of Greece (€2,71 billion), the Bank decided to allocate the state after approval received from the European Commission.

Good and bad banks Portugal

The year before, Portugal had divided the once largest Bank Banco Espirito Santo into two credit institutions: former name retained BES received a “bad” assets, and Novo Banco — “good”. Sanitation cost the regulator’s €4.9 billion

In November last year, the Central Bank of Portugal has conducted a stress test Novo Banco and found that in poor development (in the case of a recession), the Bank will lose $1.4 billion of capital, the adequacy ratio reaches zero. Then the regulator has chosen five of the 52 editions of the priority bonds of the Bank and translated them into toxic BES.

As has transferred Reuters, some investors criticized the decision, seeing in it a discrimination: the holders of priority bonds suffered losses, while other creditors measure is not affected. In the ECB they are asked to intervene. The regulator distanced. “The decision of the Bank of Portugal to attract holders of priority bonds to bail-in in relation to Novo Banco was made solely by him in accordance with the national authority. The ECB is neither required nor approved of bail-in in relation to holders of <…> in this case”, — said in a statement the regulator.