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Moody's: Evolving EU burden-sharing policy points to reduced likelihood of systemic support

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
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Moody's: Evolving EU burden-sharing policy points to reduced likelihood of systemic support
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