The timing was hardly ideal. Just as funding seized up for some of Europe’s banks, Brussels was gearing up this fortnight to tell senior bondholders to shoulder the burden of rescuing stricken financial institutions.
Whatever the merits of the “bail-in” proposals — and analysts say there are many — it is not exactly a palliative for panicky investors. Little wonder the plan has been shelved, at least for a month or two.
You could see it as a lesson learned. When Michel Barnier, the internal market commissioner, floated the measures in January, bond markets virtually froze for a few days. The stakes are only higher now.
The principle behind the reforms is simple enough: finding a mechanism to save struggling banks by forcing investors to take a hair-cut rather than forcing taxpayers to fund a bail-out.
But it involves more risk for bondholders and naturally they will expect to be paid a premium, if they are willing to lend at all. Given around €4.8 trillion of wholesale and interbank funding expires in 2011 and 2012, this is unlikely to make banks’ fundraising any easier. Indeed the Institute for International Finance even cites the bail-in proposals as part of the explanation for the recent funding troubles:
“One possible explanation for the severe market reactions is that creditors of banks have been so sensitized to the potential of being vulnerable to losses that their reaction functions have been much shortened. Contributing to this observed change in market behavior could be the debate about imposing losses on bank creditors under reformed resolution regimes as well as other regulatory changes requiring creditors to be more prudent.”
Beyond concerns about spooking the markets, there are some other more mundane, but no less important reasons for delaying these plans.
For one, the plans are not ready. The Commission, the EU’s executive arm, is still furiously trying to resolve the tremendous practical difficulties with introducing a bail-in regime across Europe. Top of the list of problems is the legal issues it raises. Tinkering with insolvency law across 27 member states is not for the light hearted.
The delay is said to be a matter or weeks rather than months. Commission officials see this as one of the most important elements in the current blizzard of financial regulation. They will be loathe to let bad timing kill the reforms. But with markets as they are, Barnier’s team may have quite a wait on their hands.
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