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Global Credit Research - 29 Apr 2013
New York, April 29, 2013 -- The steady policy progression towards resolving banks by governmental
burden-sharing with creditors is likely to continue, as declining
political tolerance amid stabilizing markets mean a greater willingness
to permit creditor losses, says Moody's Investors Service
in a new report, "Growing recourse to burden-sharing
in EU bank resolutions points to reduced likelihood of systemic support
for senior unsecured debt and uninsured deposits."
Since the onset of the financial market crisis and ensuing sovereign turmoil,
we have seen a steady progression in policy towards resolving banks that
increasingly incorporates burden-sharing with creditors.
"The recent imposition of losses (bail-in) on all classes
of unsecured bank creditors in Cyprus was another step toward broader
burden-sharing in the euro zone, and has contributed to an
acceleration of efforts to achieve a banking union, as well as a
bank resolution framework in the EU in advance of the original 2018 target
date," said Johannes Wassenberg, a Moody's Managing
Director, EMEA Banking.
"While there are significant legal, financial and political
issues to resolve, we expect convergence around a resolution framework
that will include burden-sharing for unsecured (including senior)
creditors as well as, potentially, uninsured depositors,"
added Wassenberg.
In advance of adoption of a single resolution framework, we expect
the approaches to bank resolutions in the EU will remain system-
and entity-specific; the Cyprus case does not create a single
'template' for resolution or provide precise implications
for investors and creditors vis-à-vis burden-sharing.
Policymakers at the national level continue to show a reluctance to target
senior creditors and depositors and risk broader market repercussions.
However, as illustrated in the case of Cyprus, weaker sovereigns
have had to accept burden sharing -- albeit only with junior creditors
until Cyprus -- as a pre-condition for multi-lateral
support packages. We expect that highly indebted sovereigns that
need to recapitalize their banking systems will face similar choices and
pressures. Hence, the likelihood of bail-in has increased
for unsecured creditors, including senior unsecured bondholders
and potentially depositors, in cases where banking distress occurs
concurrent with sovereign distress.
From a ratings perspective, Moody's assessment of bank credit
risk reflects our continuing view that systemic support is never assured,
senior creditors at banks not deemed systemically important are less likely
to receive support in the event of bank failures and junior creditors
of all banks are highly likely to bear losses in such an event.
We will continue to assess the implications for systemic support for senior
creditors and depositors as consensus on the burden-sharing frameworks
are reached.
Moody's research subscribers can access this report at http://www.moodys.com/research/Growing-recourse-to-burden-sharing-in-EU-bank-resolutions-points--PBC_153089
***
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Johannes Felix Wassenberg
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
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United Kingdom
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Moody's: Evolving EU burden-sharing policy points to reduced likelihood of systemic support
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