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June 06, 2012


anthony scholefield

This is nothing more than stating the normal position in receivership or administration.First to lose are the shareholders,then the bondholders and then the unsecured creitors. The position in banks is slightly diferent from other commercial entities because of the existence of secured loans in other commercial entities while banks dont generally have any. It is therefore reasonable and prudent to rank the position of ordinary depositors above bondholders but I doubt that the IMF or the ECB will agree to see their loans ranking behind ordinary depositors.

The next flaw is what if the deficiency in assets exceeds the total of shareholders and bondholders capital-you are back to looking to the unsecured creditors-the depositors -again.

Phil Kean

Hold on a minute. This is just for Eurozone Banks, or Fiscal Compact signatories, isn't it?

If it isn't then it ends any pretence that the British Government, and the BoE, are responsible for the management of the UK economy, and that - contrary to the claims - we are in any way still a Sovereign nation.

Again, if this is intended to include UK Banks, and worse, that the UK taxpayer could also become liable for bailing out foreign European Banks, then it is a decision of such magnitude and significance that, at the very least, it must be vetoed by the UK Government, no matter what the cost, and or the British people must have their say in a referendum.

If the idea is to include the UK in this EU Diktat, and this weak, useless Government lamely concedes to this, then it indicates that there's absolutely nothing that they are able to stop, including the EU's Financial Transaction Tax.

William Blakes Ghost

Is it time for a bit of Chopin as a dedication to the EU?


Andrew Smith

It is likely to be for Eurozone banks at present but there are Treaty provisions which could be used to enforce it here too as all EU member states are committed to much of the Monetary Union agreements even if they / we do not use the Euro.

I want to take slight issue with Anthony Scholefield on bonds. There may well be bank bonds out there with a higher security than current account holders or depositors; the bonds may have a charge over specific income flows or assets.

The point about bonds being specifically at risk is an issue about capital ratios. These should not be altered retrospectively just t to steal the assets of bond holders. But capital ratios mean nothing if the banks do not treat their bad debts correctly. While estimates are inevitable and small errors may happen, it seems widely acknowledged that some member state banks are seriously under reserved.

Usually UK and US are the first to reserve while Japanese banks carried bad debts as good assets for over a decade.

While on the subject can I make another plea for honesty on the cause of the current crisis. The banks which caused most problem in the UK (Northern Rock, B&B, Halifax) had the same profile as the Spanish ones now in trouble. They were over exposed to residential property loans. They were not "casino banks".

Among investment banks only Lehmans and ABN-Amro caused problems, and the latter would have been found out if RBS had done its homework as the markets demanded before they completed.

This whole thing is a failure of too much money caused by willful official policy and careless regulation - both by government agencies. That the banks took advantage of these conditions in some cases is no surprise and not to be excused, but governments cannot say they didn't know the risks.

anthony scholefield

Agreed Andrew there could be bonds secured say like property
loans secured on specific assets but this is uncommon in banks.

Excellent point about capital ratios.

Also you are so correct about the property basis of the crisis in the banks. I myself fully expected banks to go under in 2008 due to overtrading and mispricing in derivatives but frankly I was surprised that the banks had a better grip on this area than I expected.What is quite incredible now is that the trouble has been caused by bog standard property loans just as in 1974. I mean this is elementary banking prudence.In fact london and South East property prices have held up very well so the losses in the Northern areas must really be ginormous.

Dave Hollins MBA

Phil - In your anti-EU frothing, you didn't actually listen to the report, did you? The EU proposal is that bond holders take the hit on bank failure, rather than the depositor/tax payer. That is a good measure - but I suppose you oppose it, because the EU wants this right across the EU! Stand by for another Farage tirade about EU "interference" in banking!

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I am a newbie and this issue is new to me. Thanks for posting this article and I hope I will learn many things here.

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Graham Goch

Wonderful learning guys I’m a fan of your website.

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Very interesting, we always learn something and that's great.
Europe is in big trouble with the Euro. Lately, it's not enough same some countries like Greece will maybe have to get back to its ancient national money, but new added countries to the block like Bulgaria, for instance, informed that they are not willing to join the Euro.

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