Lesson 1: Unsecured Depositors
unsecured creditors, other than depositors, to
fill the solvency gap of systemically important
banks, then depositors will be bailed in again.”
It is City Research’s view that, after Cyprus,
political constraints will no longer prevent
unsecured senior bond holders and other
unsecured senior creditors from being bailed
in. “Should insolvency hit a bank where, as
in Cyprus, the overwhelming majority of the
unsecured creditors are depositors, we think
it is possible that large, noninsured depositors
will be bailed in.”
On the other hand, based on ECB data, the
liability structure of the Cypriot banks was extraordinary and unlike anything seen elsewhere
thus far in the Eurozone (see Figure 1).
liability will be carried out.”
In other words, if future bank insolvencies
are resolved starting by wiping out existing
shareholders and bailing in the unsecured
creditors, starting from the most junior and
progressing as high up the seniority ladder as is
necessary to ensure that the diminished value
of the assets is at least as large as the restructured liabilities, then the bail-in of unsecured
depositors might be repeated in the euro area.
But for that to happen another factor comes
in, as City Research, the research division of
Citigroup Global Markets, has highlighted in
one of its recent reports on Cyprus: It needs to
be politically feasible. “If there are other banks
in other countries where there are too few
FIGURE 1. EURO AREA – COMPOSITION OF MFI LIABILITIES (% OF GDP), JANUARY 2013
800
% of GDP
Other liabilities
Securities other than shares
External liabilities
Deposits of EA residents
700
600
500
400
300
200
100
Therefore, it will be possible either to liquidate (if they are not deemed systemically important) or to recapitalise (if they are deemed
systemically important) euro area banks,
without bailing in any depositors, even the
noninsured ones.
For depositors to be at risk, three conditions have to be satisfied:
• There have to be systemically important
banks.
• Depositors have to be a large share of
total bank funding.
• The banks must have very poor asset
quality and are insolvent, with the insolvency
gap exceeding the value of the banks’ unse-
cured liabilities other than depositors.
It is conceivable that in a country with
a large banking sector and a large share of
deposits in total bank liabilities, losses could
be so large that depositors (or at any rate noninsured depositors) would have to be bailed
in, in the absence of non-bank sources of loss
absorption.
It should be noted that it looks much easier
to absorb senior unsecured bond holders
into the bail-in process since the Cyprus case,
following the earlier bailing in of owners of
hybrid instruments and subordinated bond
holders in Ireland, Spain and the Netherlands
(in the case of SNS Reaal).
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Note: MFI – Monetary Financial Institutions, excluding Eurosystem. Note: external liabilities category includes
deposits by non-EA residents. Source: ECB and Citi Research
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