Emmet Oliver: New bank bill would keep taxpayer on hook in future
Published 16/12/2010 | 05:00
Sometimes you have to pinch yourself. The Irish banking crisis erupted in early 2008 and despite the passage of time and money, not a single bank, building society or credit union has shut its doors to date -- so much for consolidation and so much for creative destruction.
The US, a vastly larger economy, has managed to shut 151 banks this year alone and it has arguably far less reason for restructuring its banking system than Ireland.
The reason it can do so without triggering economic Armageddon is the genius structure that is Federal Deposit Insurance Corporation (FDIC).
This organisation, set up during the Great Depression, has yet to lose a single cent of depositor's money. But it does dole out pain for creditors, including senior debt. For example senior bondholders were completely wiped out at Washington Mutual in 2008.
The FDIC system deserves to be copied in Europe, but isn't. When the US body takes over a failed bank, insured depositors get paid first, then uninsured depositors and only then do creditors (senior and junior) and shareholders get paid.
As the FDIC bluntly puts it, "in most cases, general creditors and stockholders realise little or no recovery''.
It is brutal, but fair and seriously kills off any notions of moral hazard. The FDIC is now looking at going further, and may put senior bondholders even further back in the line, subordinating their interest to short term providers of bank funds, like those who lend to banks using commercial paper, which matures in less than 270 days.
Why? Because it is problems with accessing short term funds that mostly kills banks, generally not long term funds. Again, not particularly fair, but sensible.
Now look at the proposals this week from the Irish government for a resolution regime. Unlike a permanent structure such as the FDIC, the government's more tepid version will vanish in 2012 and senior creditors are not even mentioned in the Bill.
The linkage, a dangerous one, between deposits and senior debt is not broken in the bill as currently constituted.
It does, however, allow the Minister of the day to transfer assets and liabilities out of banks to other banks, leaving the option open of saving depositors, and leaving behind bondhonders to exist amid the wreckage.
But overall the legislation as currently drafted will leave senior debt, no matter how distressed the institution, intact and effectively underwritten by taxpayer's money. There were plenty of good reasons for doing this at the apex of the financial crisis or before Ireland withdrew from the bond market, but now the debtate has moved on.
The US Dodd-Frank Act makes it very clear that senior bondholders cannot be given blank cheques forever -- "taxpayers' funds should not be deployed to keep whole unsecured creditors of financial institutions'', it states.
Fitch believes other developing countries will in time follow the American lead -- senior bondholders must at least face a modicum of burden sharing when a bank fails.
There was little point in Ireland becoming a laboratory for such ideas considering how fragile the Irish banking system is and the EU/ECB/IMF would never countenance such a move anyway.
Yes Iceland and Kazakhstan have imposed losses on senior creditors of systemically important banks, but such non-Eurozone examples are unlikely to be too comforting for most regulators and politicians.
The new bill does allow the minister to force sales on banks, remove directors and close down banks via an orderly run off process.
But just as the terms of the bill get interesting it ducks the chief issue.
In that sense the new bill (effectively a new resolution scheme for banks) changes very little. If a new Anglo occurred tomorrow all senior bondholders would still have to be repaid in full and the huge capital gain available by making them share the burden would be out of reach.
Instead taxpayers would have to provide large amounts of capital again, only limited by the deals which could be done with junior bondholders. That unfortunately is exactly the current position today. Plus ca change.