The Banking Recovery and Resolution Directive complies with the principle of non-retroactivity?

In the latest press conference of the NBR, governor Mugur Isărescu also mentioned the law of giving in payment, and stated that the reexamination of the draft law must take into account the recommendations received from the European Central Bank.

The NBR and the RBA (the Romanian Banking Association) have expressed their opposition to the current draft, approved by the Parliament. They claim that, among other things, it violates the right of ownership and the principle of non-retroactivity of laws.

In the notice sent by the ECB it is stated that "the Romanian authorities must assess whether the retroactivity of the draft law complies with the principles of the Romanian Constitution", because in its current form, "the regulatory draft runs the risk of compromising juridical certainty and does not comply with the principle of legitimate expectations". The European Central Bank also warned that the law of giving in payment can have seriously harmful effects on financial stability and economic growth.

As for the principle of non-retroactivity, one of the initiators of the law, lawyer Gheorghe Piperea, has proved, both in writing and during the televised debates, that the principle in question is honored.

But can the same thing be said about a law with implications that are far more important not just for Europe's financial stability, but also for compliance with the rights of ownership within the European Union?

The period which preceded the coming into effect of the Banking Recovery and Resolution Directive (BRRD), on January 1st, 2016, was marked by a series of news in the international financial press, where it is reported that investors are concerned not only when it comes to the honoring of the rights of ownership, but also about the retroactive application of the national laws which implement the BRRD.

The European bail-in directive has been transposed in Portugal's legislation in mid-2015, and the institution which oversees its implementation is the Bank of Portugal.

One of the first measures that were passed, which Bloomberg wrote about in the last few days of last year, was the transfer of senior bonds issued by Novo Banco, the "good" banking institution created following the "rescue" of Banco Espirito Santo, to the "bad bank". The decision was caused by the unsatisfactory score which Novo Banco got in an ECB stress when a capital deficit of 1.4 billion Euros was discovered.

Investors have protested and are preparing a lawsuit, as they feel that the principle of equal treatment for holders of bonds that are part of the same category is being infringed upon. "This sends the signal that the ownership rights and the rule of law are not honored in Portugal", Philippe Bodereau, portfolio manager at Pimco, told Bloomberg.

"What is even more worrisome is the fact that the application of the measure has been allowed precisely by the ECB itself, which has said, no earlier than November 2015, that Novo Banco is viable", said Bodereau.

Other investors in bank bonds have expressed their shock at the way the European construe the legislation which underlies the Banking Union, as the decisions are ruled by inconsistency and lack predictability.

According to Bloomberg, the resolution measures of the BRRD (Bank Recovery and Resolution Directive) include, aside from the possible full confiscation of the shareholders' capital, of the subordinated banks' debts or of unsecured deposits, and the reduction of the value of senior bonds or their conversion into debt.

Senior bonds, which can be secured or unsecured, are securities which have priority upon repayment in the event of their issuer's bankruptcy.

In Germany's case, the bail-in law includes a provision which can turn senior bonds into subordinated bonds, according to Elke König, the current chairwoman of the Single Resolution Board (SRB) and former leader of the Federal Financial Supervisory Authority of Germany.

"The expansion of the German solution beyond its borders may not be possible", Elke König further warned, according to an article by Bloomberg, and this is how the confusion concerning the terms for the application of the bail-in procedure for the major banks with international presence deepens.

Extremely worrisome however, is the retroactive application of the "conversion" of senior bonds into subordinated bonds. "The German law is rather unfair, because it is retroactive", Dan Lustig, an analyst with Legal & General Investment Management of London told Bloomberg.

An analysis by Fitch Ratings concerning the issue of bonds subjected to the bail-in procedure shows that "the subordination of senior bonds will apply not only to new issues, but also to existing ones", even if "retroactive legislation is prohibited by the German Constitution".

But the authorities in Berlin have found the "solution". According to the explanatory norms, "the government thinks that the inclusion of existing securities is not exactly retroactive", according to the Fitch study. No comment!

A recent article published by Risk magazine also describes the uncertainty existing in the Italian bail-in legislation concerning its retroactive application. Ignazio Visco, the governor of the bank of Italy, stated that the banks have to be transparent when it comes to the application of the bail-in procedure for the bonds sold to retail customers and has admitted the existence of the judicial risk in the case of the treatment applied to senior bonds.

Visco also further said that "when the oversight institutions apply any new law they should be careful when it comes to the retroactivity of the law", according to the magazine Risk.

The statements made by the governor of the Bank of Italy, as well as the recent confiscation of the senior bonds in Portugal or the uncertain stipulations in the bail-in legislation in Germany shows that arbitrariness has come to rule over one of the most important European laws of the last few years.

And then, how can we still trust the authorities, which aren't even trying to create the appearance of regulations necessary to balance the power relationship between banks and their customers?

In a Bloomberg article in the beginning of last month it is stated that the amount of the non-performing loans in the European Union was about 1 trillion Euros at the end of 2014, according to data from the IMF, but the risk was "concealed" by the ECB with the help of the quantitative easing program.

"The risk of a bail-in for the senior bonds is not reflected in the price of these financial instruments", Paul Smillie, an analyst with Columbia Threadneedle, told Bloomberg.

Other investors and portfolio managers think that the new European bail-in directive has no other goal than to transfer the responsibility from the regulators, which know best the banks' individual financial situations, to investors and the population.

The gate of Dante's inferno had written above it "Lasciate ogni speranza, voi ch'entrate". The same message should be written on the first page of the national laws that implement the Banking Recovery and Resolution Directive.