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Cyprus-style bail-in EU Directive

An EU Directive setting out a Cyprus-style bail-in mechanism for the resolution of failing banks, which harmonises and improves the tools for dealing with bank crises across the EU, came into effect on 1 January.

Cyprus-style bail-in EU DirectiveDIRECTIVE 2014/59/EU that establishes a Cyprus-style bail-in framework for the recovery and resolution of credit institutions and investment firms in all EU member states entered into force on 1 January 2015.

According to the European Commission, the new rules harmonise and improve the tools for dealing with bank crises across the EU. They will also ensure shareholders and creditors of the banks pay their share of the costs through a “bail-in” mechanism.

The Bank Recovery and Resolution Directive (BRRD) was adopted in Spring 2014 to provide authorities with comprehensive and effective arrangements to deal with failing banks at national level, as well as cooperation arrangements to tackle cross-border banking failures.

Banks are required to prepare recovery plans to overcome financial distress.

The Directive grants authorities a set of powers to intervene in the operations of banks to avoid them failing. If they do face failure, authorities are equipped with comprehensive powers and tools to restructure them, allocating losses to shareholders and creditors following a clearly defined hierarchy. They have the powers to implement plans to resolve failed banks in a way that preserves their most critical functions and avoids taxpayers having to bail them out.

EU Commissioner for Financial Stability, Financial Services and Capital Markets Union, Jonathan Hill, said: “The Bank Recovery and Resolution Directive equips public authorities for the first time across Europe with a broad range of powers and tools to deal with failing banks, while preserving financial stability. From now on, it will be the bank’s shareholders and their creditors who will bear the related costs and losses of a failure rather than the taxpayer.”

National resolution funds are also being established. In the case of euro area Member States, these funds will be replaced by the Single Resolution Fund as of 2016.

The Cyprus ‘bail-in’ was part of an attempt to find €13.5 billion to bolster the island’s economy and forced savers to pay for the recapitalisation of the Bank of Cyprus.

Readers' comments

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  • @chris c on 2015/01/06 at 9:00 am – Probably the best thing to do is spread the risk by having three or four accounts with different banks (like investments).

  • chris c says:

    It’s interesting that not many people seem to be aware that their bank deposits were/are at risk. The reason that the €100,000 government insurance is in place is in case everyone realises and want their money back! The banks couldn’t repay it and the reality is, the governments couldn’t meet their obligations under the guarantee. Where would the Government of Cyprus get the billions they would need to pay depositors? Bulgaria had a shortfall of about 35% when they had to meet payments as the Corporate Commercial bank went out of business a few months ago.

    The rest of Europe and the USA are certainly no different, the UK FSCS wouldn’t raise anywhere near the amount needed if the top bank was allowed to fail! The USA just backtracked on their legislation to allow taxpayers as well as depositors to foot the bill for future bank failures.

    So the Ponzi scheme must be kept going so it becomes someone else’s problem. But it can’t go on for ever, Cyprus proved it.

    There is no RISK WARNING when you put your money in a bank, but there certainly should be.

  • Dave C says:

    Bail-in is the new Marxism.

  • richard says:

    So really – this is all about getting the vast majority of people across the globe into some form of debt.

    If you can’t get them into debt easily (credit – making you purchase what you can’t afford – or sub-prime lending) you entice them with ‘investments’ (a.k.a overseas property). Then – when people lock down their savings & don’t budge – you just steal their savings & pensions for ‘bail in’.

    Sounds like we have to fight the debt war.

    In the world of non-linear / ‘contradictory vaudeville’ journalism – the enemy is now really very clear indeed.

    DEBT

    BBC’s Adam Curtis On The “Contradictory Vaudeville” Of Post-Modern Politics

  • Steve says:

    Every now and then a piece of information shocks some of us readers/listeners and this is another example. Banks have failed throughout the last 150 years (the great depression, the Wall St crash and so on) and depositors have lost their money.

    When the great German Hyperinflation destroyed the Deutschmark following the second world war it made the reparations payable to the victorious allies, as well as the savings of anyone with D Mark cash assets, worthless. More recently the devaluation of the British pound in the late nineteen eighties cost private citizens and the tax revenue a fortune, not to mention the “quantitative easing” in the UK that is currently costing pensioners and anyone with savings, two or three percent in value every year and it’s been going on for six years already.

    It would be easy to say that nothing much has changed, but it has. There has been so much financial baby-sitting by the authorities over the past 30 years, particularly in the EU, that the voters, when they realise they are being bled financially, generally expect to be compensated – mis-selling, Ponzi schemes, badly managed pension funds, toxic mortgage debt; it goes on and on. The financial system is in such a mess that sometime, somewhere, banks are going to fail unless their shareholders or their clients or the tax payer bale them out. Now we can see who it’s going to be.

  • Mike says:

    Steve R – In answer to your question “Why is the tiny island of Cyprus so important to the EU that they allow this to happen.” We only have to look at the history of Cyprus for the last few thousand years to see we have been under constant occupation by one power or another. One may ask but why for a tiny, insignificant, backwater of an Island. The answer lies in our geographical location and perception by the powers of the strategic importance of that location. As a consequence we know that no one will dare to upset us too much as there are any number of opposing powers more than happy to step in and use the Island for geographical and strategic advantage.

    With the current instability in the Middle East, prospective future instability in Africa and at some stage Asia together with the possible prospect of rebellion in Europe the Island is perfectly placed, as it always has been, to be in a position to be used as a base for interventionist operations. So yes we will get slaps on the wrist, we will be told we are naughty schoolchildren, we will be derided by those who believe they know better, and constantly voice the fact, but in the final analysis we only have to look back and ask what did all the great past empires want with little old Cyprus. In the meantime I must get back to my goats.

    Hope that helps.

  • chris c says:

    A bank is a business with shareholders, just like any other so why should taxpayers be made to pay if that business makes bad bets and is going under. It has never been made clear to depositors that when they put their money in the bank it becomes an asset of the bank ie. it now belongs to the bank to do what they want with.

    It is now becoming more transparent so choose where you deposit your cash very carefully, you bear the risk.

    Cyprus may well have been a test case for Bail Ins as it has now been used as a Blueprint for the rest of the world! Perhaps the testing goes on as the reports show success:

    Recent economic developments in Cyprus, as outlined in the recent report on the IMF’s Article IV Consultation for Cyprus, have been generally encouraging, with growth expected to turn positive in 2015.

    There will no doubt be more bank failures, so there needs to be a clear track to follow when that happens. Cyprus are global leaders!

  • Steve R says:

    How can they put something in place across the EU that clearly hasn’t worked in Cyprus.

    The Cyprus government are playing Troika like a fiddle. They promise the earth until the bailout money is released and then backtrack on the agreement. What do Troika do, Nothing.

    Why is the tiny island of Cyprus so important to the EU that they allow this to happen.

  • chris c says:

    ‘a broad range of powers and tools to deal with failing banks, while preserving financial stability’.

    This translates to taking the money off unsecured creditors ie. the depositors.

    Europe doesn’t have the money to pay the guarantees. The Bulgarian government had to borrow money to honour their deposit insurance guarantee.

    This isn’t just Europe, it’s worldwide! They might change the language so it can’t be understood but it means the same thing. Try this from the recent G20 meeting:

    ‘Adequacy of Loss-Absorbing​ Capacity of Global Systemically Important Banks in Resolution’ For resolution read Bankruptcy!

    None of this is new and it will be interesting to see what happens to the Banks when they need to pay for the bets they made on the oil price. If the oil price stays down they will owe Billions! Settling these bets comes ahead of depositor protection. The USA just reversed some of the rules they introduced to protect taxpayers so it looks like they are making preparation! There is an interesting interview here that spells it out:

    Bank Bail Ins – Warning!

  • Geoff says:

    Don’t these Euro idiots realise that the whole banking structure relies on protecting the small guys (the savers) from losing their savings! The Casino, bit coins or any other crazy get rich scene will start to look more attractive than gambling on greedy bankers.

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