I would expect the terms of a long dated bank bond to effectively say “this is repayable in 10 yrs BUT if a winding up event occurs (petition, notice of winding up, creditors meeting etc) then it is it is repayable on demand.”

In practice debts would not be paid on demand but they would rank parri-passu with other debts due at the time and participate equally in any distribution in the liquidation/resolution process.

I don’t think they become payable immediately, they have to wait for the liquidation process to proceed - see the claims of Kaupthing creditors on wikileaks for example. As I understand it, there are different rounds of disbursement with the remaining assets being divvied up to each class of creditor after the preceeding round is completed.

Deposit insurance works differently as do credit default swaps. For deposit insurance, the DGS gives notice of a payout event (for want of a better phrase) and then pays out. For CDS, the international swaps associationg thingy issues a notice of default on the bonds and bilateral payments are made based on auctions of sample debt. Or some such! It is separate to the liquidation process.

Leaving aside the issue of guarantees and deposit insurance, do you agree that what assets the bank does have left after paying preferential creditors must be applied parri passu to senior debt and depositors?

I wonder does any issue arise as to the value of a debt or the amount due where the maturity date is after the date of winding up. I would be very surprised though if such debts do not become payable immediately upon notice of winding up/receivership/examinership or analagous arrangements such as resolution.

http://www.irishtimes.com/newspaper/breaking/2010/0526/breaking26.html

http://www.irishtimes.com/newspaper/breaking/2010/0526/breaking25.html

Next, Ireland has no banking specific act or SI that modifies anything relevant in the companies act. This means that depositors, CoDs, senior bondholders, tradesmen, the ESB, etc, all rank the same and would get the same proportion of their debt paid. In the pre (and post) guarantee situation the state then picks up the tab to refund depositors, with only the small amount in the guarantee protection scheme (as per the SI) to reduce the tab for taxpayers.

The deposit guarantee scheme exists entirely separately to the liquidation process in the event of bank failure. The guarantee scheme pays out in three days up to 100k. The liquidator meanwhile goes through and liquidates the bank paying back the deposit scheme and bondholders in equal measure with the proceeds of the bank. Depositors who had more than 100k on deposit have to wait for this liquidation process to see if they get more than their guaranteed deposit back.

The bondholders are parri-passu to the depositors under the banks’ articles - the liquidation of the bank gives them a certain amount.

The depositors, in addition, have a deposit guarantee scheme that provides for a minimum payment without having to go through the liquidator to get. If you like, deposit protection is analagous to CDS on bonds - it exists outside the incorporation of the bank and the contract that depositors and bondholder have with the bank.

Such is the theory anyway.

Thanks…

So, does everyone else accept the point? I’m guilty of scanning comments.

http://www.irisheconomy.ie/index.php/2010/03/18/the-baseline-scenario-on-ireland/#comment-40803

From a previous post:
For general interest…

“The general parri-passu rule is in s.275 of the companies act 1963:

275.—Subject to the provisions of this Act as to preferential payments, the property of a company shall, on its winding up, be applied in satisfaction of its liabilities pari passu, and, subject to such application shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company.

If depositors are not to rank parri-passu with other unsecured debtors then one must find an exception to this rule in statute law or in private contract law (i.e. in the contracts entered into by senior debt holders).”

All unsecured creditors rank the same unless the debt agreement says otherwise or there is an overiding statutory provision. Any subordination in priority would be in the bond itself. However, one would expect such bonds to be called subordinated bonds.

Alan Ahearne’s explains the nature of some of the senior debt in his lecture in NUI Galway (Paddy Ryan memorial lecture 2010). I recommend it as providing a good insight to the Government’s thinking (at that stage) on the point.

I think Hugh Sheehy has clarified he is not an expert on how creditors rank.

a guarantee, not to be confused with an indemnity, means that the government steps into the shoes and assumes the liabilities of the guarenteed. It is a secondary liability that arise when the principal defaults.

if bank losses are such that all equity and sub debt receive nothing in the wind up then, in the absence of the guarentee, remaining losses are shared equally (ie parri passu) between the remaining creditors.

(Secured creditors are in a different position again - they can appoint a receiver over there secured assets. Their liability is secured on an asset and they can appoint a receivor thereover. They are unsecured creditors for any balance owed above and beyond the value of their security.)

However, only one set of these creditors (deposit holders) have the benefit of a guarantee. Theses creditors have any losses reimbursed by the government.

Senior bondholders have no legitimate complaint to make about such an arrangement. Their losses are not increased as a result of paying out on the guarentee.

Legally, in the event of a wind up, the bank is prohibited from discriminating between depositors and senior debt as they rank parri passu. This does not imply that the governemnet must bail out each creditor to the same extent or even at all.

Who the governemnt bails out is their own decision

I see where you are going - I’ve been assured in briefings that senior bondholders = depositors in legal terms. The consensus here appears to be they are not. Must go find a lawyer…

no sarcasm was intended, honestly. I simply mean that its generally considered a core principle across most of Europe (though im sure with certain particular exceptions), and as such it would be quite amazing if everyone had missed some glaring loophole staring us all in the face. But you are quite right to point out that our legal and regulatory framework is confusing at best and maybe even dangerous. That such an important underlying principle is so difficult to categorically “prove” one way or the other only raises questions about other perceived principles im sure.

As for whether or not a whole host of sophisticated people in Ireland might have gotten something wrong for a whole generation, I have to say that we’d need to clarify the meaning of the word “sophisticated”. Semi-ds at €1million-plus was normal for a while in Dublin too.

Anyway, thanks again to BWII.

In addition, the state has decided to recapitalise the banks. Given that equity type and levels have changed to require vastly more unencumbered equity, this means a larger proportion of equity is required than was the case in the past.

So the losses the banks take internally is less than the amount required to put them back into shape to survive, despite their shrinking balance sheets.

(Sorry about the non-financial language, hope I give the idea).

“Is MK suggestng another €50bn of losses beyond those already accounted for by Elderfield and Honohan in the recapitalisation requirements which they said made allowance for less propitious economic environment than that predicted by the banks?”
No, or rather, only if his pessimistic estimate is reached. Using a swedish level of losses, the losses to the banking system would be 50 bn in constant currency terms (about 12% of assets under management). The initial writedowns for NAMA have come in higher than equivalent speculative property losses in Sweden, however. This is before we see what NAMA is able to do with them. The swedish AMC, Securum, lost about 40% (again in constant currency terms). (From memory, so check the figures!).

Popular Rage in Greece: http://www.occupiedlondon.org/blog/2010/05/24/298-this-is-what-popular-rage-tastes-like-politicians-heckled-abused-attacked-at-restaurants-cafes-and-on-the-greek-streets/

The volume of comments, and media coverage, demonstrates that Prof Kelly continues to make a valuable contribution. The pros and cons of the bank guarantee are explored at interesting and edifying length by the various contributors above and elsewhere.

Prof Kelly’s categorisation of lawyers as ‘parasites’ has rightly been questioned. While some legal practices are self serving, it can’t be right to tar an entire profession with that brush.

In discussing the important issue of national sovereignty, Prof Kelly makes disparaging reference to ‘republican headbangers’. The term is disrespectful to the people of Northern Ireland and their elected coalition government. Political bigotry has no place in reasoned economc debate.

actually didn’t cop that “parasite” line before. Tad melodramatic.

@ Hugh

like BWII says, i think that SI just clarifies who would be eligible under the deposit protection scheme, i don’t think it could invalidate a voluntary contractural guarantee from a bank that it rank deposits the same as bonds in the event of liquidation. But someone with a more legal background might be minded to clarify one way or the other. As previously suggested, it would seem bizarre that a whole host of sophisticated investors and commentators have gotten this whole situation completely wrong for an entire generation, no?

Is it possible to offend a lawyer by associating him with some unknown class of parisities….who knows?

How do you gain entrance to the class of unknown parisites…membership of a profession with barriers to entry, overpaid, underworked?

Stepping a bit above my pay grade here but I don’t read anything very significant into those regs. What they seem to be saying is that the liquidator assesses the payout to creditors in the normal way. If depositors are then short he may dip into this Guarantee Account that was held with the Central Bank to top them up. In other words the only thing that is ring-fenced from the normal liquidation process is this 0.2% deposited by the bank win the CB’s Guarantee Scheme.

An academic economist calling a lawyer a parasite. Oh to be in the UCD common room when the BLs come in.

Whatever about how the guarantee makes this SI temporarily moot, my question is about pre and post guarantee Irish law and the priority of depositors and other creditors in the law.

“It is hard to think of any institution since the League of Nations that has become so irrelevant so fast as Nama. Instead of the resurrection of the Irish banking system we were promised, we now have one semi-State body (Nama) buying assets from other semi-states (Anglo) and soon-to-be semi-States (AIB and Bank of Ireland), while funnelling €60 million a year in fees to lawyers, valuers and associated parasites.”

No comments here, can we read that as a general House of Commons type “hear, hear”? . €60 million a year is not to be sneezed at. I suppose you could call it job creation or adding to the GDP.

that is such a good line

I doubt if our rulers would allow it in the current market envioronment given the risk of contagion. Creditantalt comes to mind.

This is not responsive to my argument above. How will they force us to bail out the bondholders? Dust off Unternehmen Grün? If the EU core and the Eurosystem are determined that Allied must be bailed out no matter the cost, then let them bail out Allied at whatever cost. If they are going to see us right on this, then let them see us right now. To take on the debt is to run an extremely high risk of being left holding the can. By the time the burden forces us into insolvency there will be no gratitude from Europe: heard anyone thanking the Greeks for keeping SocGén whole by not defaulting? Much more important, by that time there may be no bailouts from Europe anymore either.

As per BWIIs concern, my understanding from reading the SI is that the regulator would be the liquidator, potentially allowing quite a lot of latitude on what “liquidation” or “being wound up” meant in practice.

I won’t pretend to understand Irish liquidation law and I fully understand that liquidating one of the major Irish banks would be an extremely serious and scary undertaking, but my question was a more restricted one, i.e. where in pre or post guarantee Irish law is it required that senior bond holders are entitled to equal protection with depositors? It’s been said a lot, but I haven’t been able to get any clarity on why. Conversely, the SI indicates that it isn’t the case. [again, i may be misreading]

Could a resolution scheme have been tacked on to this SI with about ten lines of text…?

Bank Bonds, no matter how senior or abstractly distinguished, of their nature entail risk. Morgan Kelly’s suggestion on debt-equity deserves some serious consideration; from the serf-perspective, and looking at the direction global forces are going, it is a no-brainer.

In whose interests are local decisions being made?