Greece to pass law preparing the ground for Cyprus style bail in

The Greek government submitted legislation to parliament on Tuesday required by its international lenders to start talks on a multi-billion euro rescue package.

Prime Minister Alexis Tsipras has until Wednesday night to get those measures adopted in the assembly. A first set of reforms triggered a rebellion in his party last week and passed only thanks to votes from pro-EU opposition parties.

The second bill, though less divisive, will still be a test his weakened majority.

Bail-Ins coming to the rest of Europe ?

The bill will put into Greek law new European Union rules on propping up failed banks, decreed after the 2008 financial crisis and aimed at shielding taxpayers from the risk of having to bail out troubled lenders

The so-called bank recovery and resolution directive (BRRD) imposes losses on shareholders and creditors of ailing lenders, in a process known as “bail-in”, before any taxpayers’ money can be tapped in a bank rescue.

The European Commission in late May gave 11 countries,  Bulgaria, the Czech Republic, Lithuania, Malta, Poland, Romania, Sweden, Luxembourg, the Netherlands, France and Italy two  months to adopt the rules, which were meant to be applied by the end of 2014, or face legal action.

France and Italy are two countries who are regarded as having particularly fragile banking systems.

The rules, known as the Bank Recovery and Resolution Directive (BRRD) ostensibly aim to shield taxpayers from the fall out of another banking crisis. Should such a crisis erupt governments will not be obliged to prop up the banks.

At any rate most countries are far too deeply indebted to play such a role.

Greek banks are particularly vulnerable at the moment,  following the liquidity squeeze imposed by the ECB and the deposit outflows in the last year. It is estimated that there are  fewer than 1% of Greek accounts with more than 100K euro deposits.

EU Bank Recovery and Resolution Directive

Resolution occurs at the point when the authorities determine that a bank is failing or likely to fail, that there is no other private sector intervention that can restore the institution back to viability within a short timeframe and that normal insolvency proceedings would cause financial instability.

‘Resolution’ means the restructuring of a bank by a resolution authority, through the use of resolution tools, to ensure the continuity of its critical functions, preservation of financial stability and restoration of the viability of all or part of that institution, while the remaining parts are put into normal insolvency proceedings.

The EU Bank Recovery and Resolution Directive provides authorities with more comprehensive and effective arrangements to deal with failing banks at national level, as well as cooperation arrangements to tackle cross-border banking failures.

Effective resolution should also address moral hazard, as one of its key functions is to enhance discipline within the markets. Resolution is thus a vital complement to other work streams designed to make the financial system sounder, e.g. making banks stronger through requiring greater levels of better quality capital, greater protection of depositors, safer and more transparent market structures and practices, and better supervision.

Why is a EU framework for bank recovery and resolution needed?

During the recent financial crisis, a number of banks were bailed out with public funds because they were considered “too big to fail”. The level of state support was unprecedented1. While this may have been necessary to prevent widespread disruption to the financial markets and real economy, it is clearly undesirable for taxpayers’ money to be used in this way at the expense of other public objectives. In the future, the financial system must be more stable and banks must be permitted to fail in an orderly manner, so that government bail-outs are not needed.

The high profile national and cross-border bank failures in the last few years (including Fortis, Lehman Brothers, Icelandic banks, Anglo Irish Bank and Dexia) revealed serious shortcomings in the existing tools available to authorities for preventing or tackling failures of systemic banks, those that are intrinsically linked to the wider economy and play a central role in the financial markets. The ability of governments to support banks which are too big to fail with squeezed public finances is becoming increasingly unsustainable.

The Prudential Regulation Authority (PRA) in July 2014 proposed changes to its rules to implement the EU Bank Recovery and Resolution Directive (BRRD) “the common set of tools and powers for dealing with failing banks” which has  become effective in the UK from January 2015.

The Bank of England has also  recently reduced the amount of guaranteed deposits to 70ooo pounds ‘because of the falling value of the euro in relation to the pound’.

Government may need opposition votes to pass legislation

The bailout bill also includes the adoption of new rules for the country’s civil justice system, aimed at accelerating lengthy judicial processes and cutting costs.

Together with his coalition partners from the right-wing Independent Greeks party, Tsipras has 162 seats in the 300-seat parliament. But last week’s rebellion cut his support to just 123 votes, meaning he is likely to need opposition votes again.

Greece on Monday reopened its banks and repaid billions of euros owed to the International Monetary Fund and the European Central Bank in the first signs of a return to normality after it struck a cash-for-reforms deal with other euro zone countries last week.