July 23, 2012
The ECB has shifted its stance on bailing in senior creditors. Whereas, under Trichet, it vehemently argued against such action, Draghi has now indicated it would be appropriate to share bank-failure burdens more widely. The shift in the ECB’s stance is sound in principle and logical against the background of forthcoming legislation on an EU-wide bank resolution regime (an integral part of the planned Banking Union), but the timing is surprising. Not only is agreement on the resolution regime (scheduled for 2018) and Banking Union far off, the threat of bailing in senior creditors will also further undermine confidence in the EU banking sector. Two consequences are likely: (i) EU programme countries that received financial assistance, above all Ireland, will press for a revision of the terms, understandably claiming it was on the insistence of the ECB and creditor countries that they spared senior creditors and instead transformed private debt into public debt. (ii) EU banks’ funding costs will rise further and their ability to raise funding in the market will continue to be impaired. Already, Q2 issuance (EUR 97 bn) was only 2/3 of that in Q2 2011, and the share of covered bonds – which would not be bailed in – has jumped to almost 60%, against an average of about 1/3 in the pre-crisis years (2005-08). And: when Trichet refused senior creditor bail-ins in late 2010, CDS spreads on EU banks’ senior debt stood at 150 bp – but now at 250 bp.
© Copyright 2013. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”.
The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.
In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht. In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange regulated by the Financial Services Authority for the conduct of investment business in the UK. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Limited, Tokyo Branch. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product.