THE EU IS CONSIDERING RESCUING THE BANKS USING THE CUSTOMERS' DEPOSITS Cyprus - the rule, rather than the exception

The European Union is proposing using deposits to recapitalize distressed banks.

Therefore, the precedent set in the case of Cyprus, where the deposits opened with Bank of Cyprus and Laiki Bank which exceed 100,000 Euros will be taxed with up to 60%, could become the standard procedure for dealing with the future banking crises.

The finance ministers of the European Union (EU) will be reviewing today a proposal to which concerns the use of all the liabilities of distressed banks, except for the deposits which are guaranteed up to 100,000 Euros, for their recapitalization. The officials reunite in Dublin, to discuss the law concerning the banking resolution, which is expected to come into effect in 2015.

Financial analyst Dragoş Cabat considers that exceptions should be turned into rules, by creating a European legislation, or else this could lead to cases of discrimination between the EU member states. Besides, there have been voices in Cyprus which claim that treating the country as an isolated incident represents an act of discrimination towards it.

The president of the European Central Bank (ECB), Mario Draghi, recently said that the solution used for Cyprus does not represent a model, in an attempt to assuage fears that the deposits will become a source of financing for the troubled banks in the Eurozone.

The document prepared for today's reunion stipulates allowing even the use of interbank deposits with a maturity of less than one month in the banking resolution process. "Even though using interbank assets involves certain risks, it is preferable for them not to be excluded from the bail-in package", the document states. If the proposal gets accepted, it could cause interbank lending, which is already at a very low level, to shrink further, despite the efforts of the ECB, which has so far pumped over 1 trillion Euros into the system. France and Italy have expressed reservations concerning this initiative, in a meeting which took place Wednesday, in Brussels.

The banking resolution procedures, including the bail-in, will fall under the task of a new independent authority set up at the level of the member states, which can also be created within the existing institutions, such as the central bank, but with clearly delimited roles.

In the bail-in, the authorities will not be able to act against the guaranteed deposits of up to 100,000 Euros, securitizations, including covered bonds, of any financial obligations resulting from the holding by the bank of any assets or money of the customers, or from a trust agreement in which the bank is the trustee, provided that the customer and the beneficiary in question will be protected by the law of insolvency or by civil law, as well as against any receivable against the employees (current or overdue salaries, transfers to pension accounts and other fixed compensations, with the exception of discretionary compensations of any kind), commercial creditors (providers of goods and services needed for the day-to-day operation of the institution, including IT services, utilities, commercial operators of the rented spaces, service providers and maintainers of the occupied properties), tax or social security authorities, if the liabilities towards them are protected according to the law of insolvency or civil law.

The exception of the securitized assets does not prevent the authorities from a securitized asset or to a part of it, whose committed collateral exceeds the current value of the assets presented as collateral.

In emergency cases, when the involvement of a liability or of a liability class in the bail-in process can affect the continuity of the critical activities of the bank, the financial stability or can cause contagion effects, the authorities can opt to exempt the deposits held by individuals or SMEs, including the amounts which exceed the guarantee threshold; the financial liabilities derived from derivatives contracts; interbank deposits with a maturity of less than one month.

• EU states will set up funds for the rescue of distressed banks

EU member states will need to set up rescue funds, financed by banks, with resources amounting to at least 1% of the value of the deposits guaranteed in the country in question, which would be used in the procedures for the rescue of a bank which is about to collapse.

Thus the rescue (banking resolution) fund must reach at least 1% of the minimum guaranteed deposits set up with the banks within the country within up to ten years, during which period the banks' contributions will be scaled uniformly. The resolution fund will come as an addition to the funds for the guarantee of bank deposits created in each EU member state.

If, before the expiration of the ten year-period, the resolution fund uses over 0.5% of the funding of over 0.5% of the value of the deposits guaranteed on a national level, the period during which the fund will succeed in reaching the 1% target can be extended by up to four years.

After exceeding the initial period, should the financial resources of the bail-in fund fall to less than half of 1% of the balance of the guaranteed deposits, the contributions levied by the banks will amount to a minimum of 0.15% a year based on the amount of the guaranteed deposits.

The resolution fund will annually charge contributions from banks, which will be set pro-rated based on the value of the assets less their own funds.

Even though many European officials have tried to present the Cypriot case as one which will no not happen again, many experts consider that this marks a change in the approach of aiding distressed banks on a European level, to stop resorting to public funds.

The Dutch finance minister Jeroen Dijsselbloem, who leads the Eurogroup, has said that in the future, the authorities in the Eurozone should ask banks to recapitalize themselves, and resort to shareholders, bondholders, and, "if necessary", to unsecured deposits. The European Commission has drawn up the first form of the draft law, but has left EU member states and the European Parliament to decide if and when they will force depositors to take losses and when a troubled bank should be saved or shut down.

The European authorities are not the first which propose the use of liabilities for the recapitalization of distressed banks, the draft budget for this year of the Canadian and the open bank resolution of the Central Bank of New Zealand contain similar provisions.