The recent bailout obtained by Cyprus raised concerns throughout the EU financial sector because ordinary depositors were asked to help foot the bill for Cyprus’s share of the bailout costs. In the short-lived initial plan, all bank depositors were to be required to pay a levy, in return for an equal interest in the bank’s shares, but almost all sectors of Cypriot society were vehement in their opposition to the plan. In the end, the levy was only applied to depositors with more than €100000 in their banks – irrespective of whether they were businesses or private individuals.
The Cyprus situation was a Rubicon because, previously, bank deposits were regarded as untouchable – but, of course, EU guarantees only covered the first €100000 of deposits. Corporate investors and shareholder had always been fair game in the event of a banking failure since they had elected to take a risk (however small) by investing in the bank and shared in its profits in the good times.
EU Finance Ministers have now come to a draft agreement as to who will foot the bill for future bank bailouts and in what order of priority. The new policy would apply to all bank bailouts across the European Union, so it ought to foster a degree of confidence amongst investors and reduce uncertainty. The plan is designed to reduce the risk that tax payers have to foot the bill for future banking disasters. Under the draft accord, a failing bank’s creditors (i.e. those that have lent money to the bank) and shareholders will be first to absorb losses; the next tier will be larger depositors with balances above €100000; should more cash be required, national governments will step in, so tax payers ought to be the last people asked to cough-up.
This should prove to be another “bolting the stable door” exercise since stress tests and increases in liquidity requirements for banks, plus a raft of other measures are being implemented to avert a future EU banking crisis.