12.7.1 Arelevant characteristic?

The Crisis Communications do not require burden-sharing by senior creditors. Accordingly, most bank State aid cases are characterised by an absence of burden-sharing by senior creditors. But there are a few notable exceptions:

Amagerbanken was a Danish bank. Amagerbanken was wound-up under the Danish winding-up scheme.1 Under this scheme, the FSC would create a subsidiary bank (New Bank2) that would acquire the assets of the failing bank (Old Bank). New Bank would also take over the unsubordinated liabilities for an amount equal to the value of the assets, on a pro-rata basis. This means that shareholders and subordinated debt holders were left behind at the Old Bank. Senior creditors were protected though not fully, since they were taken over at a haircut (depending on the value of the assets).

Accordingly, in the case of Amagerbanken, equity and subordinated liabilities were not transferred to the New Bank, but remained in Amagerbanken. Guaranteed liabilities were taken over at their nominal value, while unguaranteed liabilities were provisionally transferred at the level of 58,8% of their nominal value. This means a haircut of 41,2%.3

The haircut for senior creditors of Amagerbanken had a significant impact on the funding costs of Danish banks. Because of the haircut for senior creditors, Moody’s downgraded several Danish banks.4 This lead to funding problems for some Danish banks. In its decision of 9 December 2011, the Commission observed that “as a consequence of the application of the winding-up scheme in several cases senior creditors have taken losses which is unique in the European Union and which has increased the Danish bank’s funding costs”.5

In 2011, Denmark introduced the compensation-scheme, in addition to the winding-up scheme. Under the compensation-scheme, senior creditors did not suffer losses. In its decision from August 2011, the Commission considered this to be acceptable, since the burden-sharing requirement of the Restructuring Communication did not extend to senior creditors.6

Consequently, there is an important difference between Amagerbanken (which was wound-down under the original scheme) and Fionia Bank. In the latter case, there was no burden-sharing by senior creditors, since only equity and subordinated debt remained at Old Fionia.

Although there was no burden-sharing by senior creditors in the case of Anglo Irish Bank, such a burden-sharing was contemplated by the Irish authorities. However, the ECB advised the Irish State to not bail-in the senior debt.7 The Economic Adjustment Programme for Ireland explains the choice to spare the senior creditors:

The question of burden-sharing by senior creditors was briefly addressed by the Commission in its decision on Anglo Irish Bank. In the decision, the Commission considered that it was legitimate to assess whether burden-sharing by senior creditors could not be achieved. However, the Commission went on to consider that it “had not received any detailed proposal on how to make the senior creditors participate in the burden-sharing without increasing the cost of the resolution for the State”.9

In the literature, it has been remarked that the approach to burden-sharing by bank creditors has evolved over time.10 In the early stages of the financial crisis, governments were very cautious not to scare off bank creditors. The case of Anglo Irish Bank illustrates that in 2011, burden-sharing by senior creditors was deemed too risky.

In the context of an Economic Adjustment Programme, Cyprus received financial assistance from the EU-IMF. The euro area countries agreed to a package of financial assistance of up to EUR 10 billion for Cyprus.11 This rescue package was agreed upon on 25 March 2013.12 An important feature of the rescue package for Cyprus was that to some extent depositors were included in the bail- in.

The Programme provided for a reform of the Cypriot banking sector:

The uninsured depositors of Bank of Cyprus and Cyprus Popular Bank (Laiki) were bailed in. By contrast, there was no bail-in of depositors of CCB and Hellenic Bank.

The rescue package thus included burden-sharing by uninsured depositors (i.e. above EUR 100.000). Interestingly, the initial rescue package even included burden-sharing by small depositors: the initial rescue package proposed a levy of 6,75% on insured deposits (below EUR 100.000) and a levy of 9,9% on uninsured deposits (above EUR 100.000). The initial rescue package was however rejected by the Cypriot Parliament.

In the literature, it has been remarked that the initial rescue package showed “the political willingness on the part of the eurogroup to make savers bleed for their choice of a particular bank, or even banking system”.14 However, it has also been noted that the bail-in of small depositors in the initial rescue package “was later regretted for its potentially disruptive impact on depositor confidence throughout the Union, and numerous official statements tried to assure that it would not happen again”.15