Special Resolution Regime for Banks

John McHAle writes: “It is important to be clear about what is not being debated. No credible person is advocating reneging on explicit guarantees to creditors; at issue instead is what to do when existing guarantees expire. Nor are there serious arguments for imposing losses on ordinary depositors or on secured creditors such as the European Central Bank (ECB) on their liquidity support to Irish banks.”

But how then can this proposal save the State any money in the Anglo case? Anglo’s accounts published last week showed that there was 15bn in senior debt on 31 December 2009. The other 55bn in funding consists of ordinary desposits, short-term money market stuff, and Eurosystem liquidity.

Of the 15bn in senior bonds, the accounts make clear that the bulk of it, and perhaps all of it, matures before the Guarentee expires at the end of September.

There is no-one to be “bailed in”.

Noel,

With the size of the numbers being thrown around this week, it s easy for a billion to be devalued. While the piece in the Times is not only about Anglo, there a substanial amount to be saved from a bail-in appraoch even there. Karl Whelan does a nice job laying out the numbers on the next thread. While in the context of total liabilities of 81 billion euro, 2.3 billon in suborindated debt might seen trivial, but even this would go a long way towards towards meeting a year’s worth of the savings to be sought in Budget 2011. Moreover, as Karl notes, up to 6.6 billlion euro of senior debt will mature after the guarantee expires in September. (It is again frustrating that we do not have the precise figures.) This is serious money in the context of the sums being mentioned for Anglo recaptialisation. It is simply not true that there are only trivial amounts to be saved by bailing in private creditors.

@ D_E

I would baulk at extending beyond Anglo and IN. As pointed out elswhere, AIB is probably not insolvent in that it could potentially sell overseas assets and raise capital from existing shareholders. More over reneging on the senior debt in AIB would almost cetainly make iit more difficult to raise senior debt for BOI.

@John McHale

“While in the context of total liabilities of 81 billion euro, 2.3 billon in suborindated debt might seen trivial, but even this would go a long way towards towards meeting a year’s worth of the savings to be sought in Budget 2011.”

But it has been pointed out in that same thread that the subordinate debt does not mature until 2014 or later, and nothing that the Government is doing precludes the burning of that debt at a future date. Or perhaps I should ask that as a question to you: What is it that the Government is doing that precludes the burning of that debt after September?

“Moreover, as Karl notes, up to 6.6 billlion euro of senior debt will mature after the guarantee expires in September.”

No, Karl Whelan did not say that — and if he did then he is mistaken. It is easy to look at Anglo’s latest accounts. Have you done that? They are on-line:

http://www.angloirishbank.com/About-Us/Reports/Annual_Report_Accounts_2009/Annual_Report_Accounts_PDF.pdf

Take a look at note 39 on page 103. It shows that as of 31/12/09 Anglo had 15bn in senior bonds. 670m is covered bonds, so can be excluded. The question you are interested in is how much of the remainder expires after September. Clearly the roughly 1.5 bn in short-term CDs and CPs mature within the next few weeks and months. Of the 13bn in MTN, the footnote says that “€7.4bn of medium term notes, all of which is Government guaranteed and matures by September 2010, were issued in the period.”

By “that period” the footnote means the accounting period, which is 1/10/08 to 31/12/09.

What about the remaining 13bn-7.4bn = 5.6bn? It is ambiguous, but all we know is that it must have been issued before 1/10/08. (I am assuming that Anglo has not issued under the new 5-year Guarentee scheme for senior bonds.) But it might well still mature before this September. For example, a 3-year MTN issued in July 2007 would not be included in the 7.4bn figure, yet is still covered by the Guarentee and matures before this September. Ditto a 2-year bond issued in February 2008 (which has already matured, but did so after the 31/12/09 closing date for the accounts.)

At most, 5.6bn of senior stuff is locked in until after September. More likey, less than this is, and possibly little or none of it.

There is no pot of gold among Anglo’s creditors.

Tull,

You seem to be saying that the government should fully bail out private creditors to maintain a 100-percent-credible commitment never to force losses on them in the future

If you are going to do that, would it not be cheaper to use explicit guarantees for future issues?

A bright line should be drawn between debts incurred by private banks in the past and sovereign/guaranteed debt. I am surprised by the willingness to take on responsibility for private debt based on a fear of a bond market reaction that seems on its face irrational. I grant you the notion of fully reational investors has taken a battering in recent years. But it is not enough to point to worst-case reactions to bailing in those who actually incurred the debts without properly considering the implications for the forward looking cost-benefit calculations of future investors. I fear that the banking system rescue will be made needlessly costly because of the use of an inappropriate model of extreme contagion resultin from any sort of bail-in action. I can buy the model of extreme contagion in the midst of a widespread panic such as occurred in September ’08. But that is not where we are now.

@John

I do not think I said fully bail out. I concede that Anglo could be a test case for seniors bearing losses because it is deeply insolvent

In the case of AIb it is less clear cut that it is insolvent. Secondly, it is also the case that AIB & BOI are sytemically important. No other developed country has i) fully nationalised or ii) haircut seniors in a sytemically important institution. They have engaged in ingenuity to get around this problem. Perhaps you could point out if there are stances of senior debt being haircut in important banks in recent crises in the developed world.

You have also to bear in mind what senirs bought into here. Legally it is my understanding that they rank pari passu with depositors. So if we are going to get them to share pain, what is you attitude to doing the same to large deposits?

To me , its a cost benefit decision not ideology. In my view there is a non trivial risk that buring seniors in AIB/BOI makes funding the system mor problematic especially given the fact that deposits do not cover loans. Also since the same institutions that buy bank bonds also buy sovereigns. We have to really think about the implications of going down this road.

That of course should not preclude us availing of market imperfections. If the world thinks you are going to default and senior bank bonds trade at a significant discount to par then buy them back. During the crisis, the EBS attempted to buy back its own MBS at 70c on the euro.

@John,

my memory is that the seniors in WM operating cos. got their money back while the holding company senior debt was wiped. I stand to be corrected though.

I do not agree with your last sentence re subordinated debt. A more correct analysis would be that all liquidity providers have been reassured but that all capital providers know they will be hurt but maybe not enough.

@John McHale

“The government’s actions seem designed to make all creditors–past and future, senior and subordinated–confident they will get their money back.”

Yes. I cannot see the sense in this total blanket 100% untouchable bail-out! Punt the lot on the citizenry is the message – and most in global capital markets must find this incredible – I certainly do. Where billlions can be saved – bail_in or otherwise, save them. I would wish to be much more ruthless.
On Time & Bank Resolution, we need it yesterday – but this administration’s concept of decisive decision making would drive anyone to despair ……… Do it yesterday and Irish State has leverage come September …….. and in the interim send out the message that there is a ‘limit to what the Irish serfs will take’ (but I’m not too optimistic on that one either after observing the vote of the ‘sheeply shopping’ on Oireachtas Live – simply unbelievable!). Keep up the opposition ……..