Not the full-on collision of the two which initially popped up in Cyprus.
Still, we missed this slapdown by the ECB… directed at Spanish plans for the deposit guarantee fund there to buy out retail investors from illiquid preferred shares and subordinated debt in unlisted banks, when those banks are being restructured.
Because the investors would otherwise face losses from a possible bail-in of this debt, there’s a similar theme of tricky burden-sharing. That and the reality that deposit insurance schemes remain financed in different (and fragmented?) ways around Europe. Anyway, here’s the ECB opinion:
As previously pointed out, the ECB supports rules which provide that the available financial means of deposit guarantee schemes may be used to finance resolution, as this allows for synergies between such schemes and resolution financing, but considers it of the utmost importance that this does not compromise in any way the core function of deposit guarantee schemes in protecting insured deposits…
To fulfil its core role of protecting insured deposits in the event of bank insolvency, the DGF needs to be able to rely on a highly liquid asset structure. The ECB views the envisaged purchase of equity shares in non-listed banks as conflicting with that prudential principle and would therefore caution against amending the investment rules applying to the DGF that allow such purchases…
The measures to be taken need to carefully weigh the benefits (i.e. the potential positive contribution to the value of the Fund for Orderly Bank Restructuring’s shareholding in banks, as well as the mitigation of the potential risk of litigation by certain categories of creditors or shareholders of non-listed banks) against the costs, in particular the reduced tax revenue for the State resulting from lower financial results of the banks owing to the extraordinary contributions to the DGF. In addition, it should be assessed whether the DGF’s limited funds would be best used for the benefit of retail investors or instead for other financial stability purposes, such as replenishing the DGF and thereby reinforcing market confidence in its ability to carry out its core role.
Got that?
The central bank wants the deposit guarantee fund to be OK with taking a broader role in financing the resolution of banks anyway (because this is the future!) but also not to get stuffed with bad assets such that its core obligation is in any way questioned.
Meanwhile Spain should think of helping retail investors (and avoiding holdout litigation) but should also think of the banks who pay into the deposit guarantee fund, and of insured depositors.
As we said, tricky.
Related link:
Finland’s Spanish seguridad – FT Alphaville