Tuesday, June 12, 2012

€370bn of unsecured bank bonds mature before bail-in provisions kick in

Eurozone banks have 5.5 years to convert their €370bn of unsecured debt into secured bonds. They certainly won't be able to roll most of that debt because the bail-in provisions are expected to kick in on 1-Jan-2018 when unsecured bonds will essentially carry "equity risk".

Source: Barclays Capital (click to enlarge)

As Barclays points out in a bail-in "equity would absorb losses first, followed by subordinated bondholders, then senior bondholders". Withing the next 5 years many banks who still have some unencumbered assets would move to covered bonds to refinance these notes.

Interestingly, deposit guarantee programs (but not the guaranteed depositors) would be pari passu with senior unsecured creditors. That's why Germany (who has more than one deposit insurance program) is concerned about moving to a pan-Eurozone deposit guarantee program. If periphery banks fail, Germany would once again be on the hook.
MarketWatch: - Germany's Federal Association of Public Banks said Monday it is opposed to a banking union as proposed by the European Commission and fears it might lead to a looting of the German banks' deposit insurance funds.

"It seems to me absurd that our deposit protection schemes, which were built over many years, should be used for insuring savings deposits in euro-zone crisis countries," said association President Christian Brand. Such a collectivization of risks would significantly go beyond the idea of European solidarity, he added.
But unless a pan-Eurozone deposit insurance program is put in place, many periphery banks would lose their deposit base. Without deposits or the ability to issue unsecured debt, many banks will become permanently dependent on the ECB for funding.

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