An upcoming rescue of Greek banks, set to be largely financed with public money, should not be seen as a template for the future because Greek lenders were taken “hostage” by a debt-laden government, the head of the eurozone's bank resolution body said on Tuesday.
Elke Koenig, chair of the Single Resolution Board, said future bank resolutions will follow new European rules, due to come into full force in January, which dictate that stakeholders in a bank, from shareholders to creditors and uninsured depositors, contribute to a rescue before public funds can be called on.
As part of a bailout package agreed last month, Greece is set to obtain 25 billion euros for plugging capital gaps at its banks – many of which are majority-owned by the state after a previous rescue.
The banks’ senior bondholders will likely be “bailed in,” seeing the value of their investments written down, but depositors will be protected to avoid harming the wider economy, marking a deviation from the EU's Bank Recovery and Resolution Directive.
“Greece has a sovereign financial crisis and, to some extent, the sovereign took the banks hostage,” Koenig told reporters in Vienna.
“Therefore you now have fundamental restructuring and recapitalization needs for the banking sector. The BRRD (Bank Recovery and Resolution Directive) is designed to solve the problem in a bank. So that’s why I would caution against taking what we might see in the next months in Greece as the model for the future.”
The European Union estimates that Greece’s four big banks will need between 10 billion euros ($11.18 billion) and 25 billion euros to shore up their capital reserves, but the exact amount needed will depend on the results of ECB stress tests and asset-quality reviews.
The Single Resolution Board (SRB) was set up earlier this year to handle failing eurozone lenders. From January, Koenig will decide how big a buffer of “bail-inable” bonds, known as MREL, banks on her watch must hold on top of their core capital buffers to tap in a crisis.
Diverging national rules on how MREL are defined have been a source of concern for investors.
Germany, for instance, has put forward a proposed law which effectively subordinates certain senior unsecured bonds to other senior debt, such as interbank and corporate deposits and money market instruments.
Koenig, the former head of Germany's financial watchdog, called for a unified European approach but praised the German proposal.
“Of course I would prefer a single approach but so far I’m not seeing one emerging,” Koenig said. “We are hearing a lot of support for the German proposal, which is a smart way of dealing with the problem without requiring huge structural changes.”