Time to expand the Cyprus bail-in model to the entire EU?

Market participants say that while the idea, presented in a document seen by EuroWeek Bank Finance, has only minority support, the Cypriot bailout has increased policymakers’ interest in the possibility of implementing senior bail-in earlier than the original deadline.

The document, published at the end of March by the Danish, Dutch, Finnish and German delegations of the Working Party on Financial Services — which is helping European policymakers to formulate the bank Resolution and Recovery Directive (RRD) — argues that senior bail-in should come into force in 2015, along with the rest of the directive, rather than 2018, as originally planned.

The arguments against doing so are not strong enough, according to the authors of the paper.

The RRD — another term for the European Commission’s Crisis Management Directive (CMD), which was published last June — does not prevent member states from applying bail-in earlier than 2018.

But leaving them to do so on an individual basis goes against the EC’s desire for harmonization of bank resolution models and could lead to an uneven playing field in terms of access to funding markets, the paper says.

“Diverging resolution instruments would also hamper a consistent approach to resolving banking groups active in several member states which have or have not implemented this tool,” it adds.

Not only does bail-in help remove the implicit state guarantee from the banking sector, it also preserves the public resources of member states as well as those of the European Stability Mechanism, limiting the need for backstops for the incoming single European resolution mechanism, the paper says.

Bail-in is an effective way to distribute losses among the relevant stakeholders of a failing bank, it says — and enforcing it on a mandatory basis from 2015 would “avoid adverse incentives” and ensure a level playing field for European credit institutions.

Jeroen Dijsselbloem, the Dutch finance minister and head of the Eurogroup, caused volatility last week when he suggested that the Cypriot bank bail-out — in which senior bondholders are being haircut, along with uninsured depositors — could provide a template for future bank bail-outs, even before the RRD comes into force.

He later retracted his comments, but many market observers felt the outcome of the Cypriot bail-out reinforced arguments for bail-in. One banker told EuroWeek Bank Finance that supporters of early implementation were “still a minority, but becoming a bigger minority."

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