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Who Suffers When Banks Fail?

Europe is crafting new rules for winding down struggling banks that are meant to avoid any more expensive, taxpayer-funded bailouts as well as the financial panics triggered by surprise losses, such as those suffered by savers over the past year in Spain and Cyprus.

But with several countries demanding the right to shield entire classes of bank creditors from getting burned during a failure, the new rules may keep the European Union close to its status quo: The haves bail out, while the have-nots bail in.

[image]European Pressphoto AgencyPierre Moscovici of France, which wants to have national discretion in bailouts.

In other words, governments in the richer countries will be able to prop up weak banks if they threaten to drag down the economy, while poorer ones will have to share the cost of crises with bank investors and creditors.

At a meeting in Luxembourg on Friday, EU finance ministers are expected to reach an agreement on the new rules. They will force banks to draw up detailed plans on how they would downsize or close during a crisis, require governments to set up national resolution authorities and funds to implement bank restructurings, and spell out the order in which investors and creditors have to absorb losses.

Had these rules been fully in place in 2008, all the bank failures since then in the EU, except perhaps Ireland’s Anglo Irish, could have been resolved without taxpayer money, according to the European Commission, the EU’s executive arm.

After much back and forth, ministers are set to give an extra layer of protection even to large deposits held by individuals and small and midsize companies when allocating losses, arguing they have a harder time assessing a bank’s riskiness. That comes at the expense of big corporations, whose deposits above €100,000 ($134,000) will be converted into shares at the same time as other senior, unsecured creditors.

But to the dismay of the commission, which is seeking a uniform regime across the bloc, several governments also want to be able to exercise discretion over which liabilities would be excluded from losses when a bank fails. According to officials involved in the negotiations, they are likely to win.

France—and it is far from alone—wants to be able to use its national resolution fund, and, until that starts functioning, public money, to step in and rescue a bank before any large depositors take a hit.

Taking the Hit

During a bank’s failure, its investors and creditors would take losses in this order, unless a country decides to exclude them:

  • 1. Shareholders
  • 2. Junior creditors
  • 3. Senior creditors, large corporate deposits above €100,000
  • 4. Deposits above €100,000 owned by individuals, small and medium-size companies
  • 5. National deposit-guarantee funds

Source: WSJ reporting/EU documents

That would allow governments to avoid another Cyprus scenario, where politicians are struggling to explain to voters why they didn’t shield life-long savers, charities and local companies from steep losses imposed on deposits above €100,000 in the country’s two biggest banks.

The Spanish government, under a recent bank bailout deal with the euro zone, was also unable to protect ordinary bank customers who had been talked into converting their savings into junior bank debt that quickly went bad.

Other creditors that should in the French view be close to the emergency exit are owners of derivatives sold by the failing bank, as well as banks that provided short-term loans to it—the very liabilities that sparked global panic after the collapse of U.S. investment bank Lehman Brothers in 2008.

The exclusion of interbank loans is also advocated by the European Central Bank, which is growing tired of being the sole liquidity provider for Southern European banks that have lost the trust of their peers.

The reality is, bailing in hurts, so when the broader stability of their financial system is at stake, governments will usually prefer to step in rather than take the blame.

That dynamic has changed somewhat since euro countries began talking about mutualizing some banking risks by allowing their common rescue fund to directly recapitalize banks. Rich states like Finland and the Netherlands, keenly aware that they might have to make up the difference, want to keep exceptions to a bare minimum.

But, as French officials are quick to point out, when the Dutch bank SNS Reaal failed earlier this year, the Netherlands bailed out senior bondholders and all large depositors.

Countries outside the euro zone like the U.K. also want national flexibility, fearing that the obsession of some euro-zone governments with keeping recapitalization costs low—so they don’t have to foot the bill for other countries’ financial missteps—will lead to overly aggressive bail-ins at their own banks.

“The application of these [bail-in] tools can be different in different countries, say in euro-zone countries and non-euro-zone countries,” the Lithuanian Finance Minister Rimantas Sadzius, who will be leading negotiations on the new rules with the European Parliament, said in an interview Wednesday.

Mr. Sadzius said different treatment was necessary because of bigger currency risks in non-euro countries and the absence of a bailout fund.

Even advocates of more flexibility, including France, say they are ready to place some checks on the exclusions, for instance by capping how much they can cost or by having them approved by some centralized authority.

The commission wants that job, but others are pushing for the European Banking Authority, where national supervisors still call the shots.

Another point where things may look different for euro ins and outs and haves and have-nots is the timing of the new rules.The official kick-in date for the EU rules is likely to remain 2018, according to officials. But euro-zone finance ministers will also be having a separate discussion over the scope of the bail-in required before their common rescue fund can step in—something that officials now say could become possible in the fall of 2014.

The official kick-in date for the EU rules is likely to remain 2018, according to officials. But euro-zone finance ministers will also be having a separate discussion over the scope of the bail-in required before their common rescue fund can step in—something that officials now say could become possible in the fall of 2014.

—Tom Fairless contributed to this article.Write to Gabriele Steinhauser at gabriele.steinhauser@wsj.com

This originally appeared here.

Rescuers in Helicopters Reach Himalayan Quake Villages

Published September 19, 2011

Associated Press

  • nepal

    British Embassy staff look on after the embassy’s compound wall collapsed reportedly killing three pedestrians following an earthquake in Katmandu, Nepal, Sunday, Sept. 18, 2011. (AP)

GANGTOK, India –  Rescue workers in helicopters and earth movers raced Monday to reach Indian villages cut off by mudslides after a powerful earthquake killed 53 people and damaged more than 100,000 homes in the remote Himalayan region, officials said.

Three emergency workers were killed in the frantic, rain-soaked rescue effort. More than 6,000 troops worked to clear concrete slabs, bricks and mud to rescue scores of people trapped under houses that collapsed when the 6.9-magnitude quake struck the mountainous region Sunday evening.

Nine helicopters dropped food to villages, airlifted a medical team, evacuated the injured and conducted damage assessments, Indian Home Secretary R.K. Singh said. Heavy construction equipment was used to clear some of the blocked roads, he said.

“The rescue and relief operations are in full swing though they were hampered … by poor weather,” he said.

At least 32 people died and 100 others were injured in the northeastern Indian state of Sikkim, where the quake was centered near India’s border with Nepal, Singh said. At least 10 of those killed worked for the same hydroelectric project, he said. It was not immediately clear how they died.

Seven other people were killed the neighboring Indian states of Bihar and West Bengal, he said. Seven people died in Nepal, and China’s official Xinhua News Agency reported seven deaths in Tibet.

Most of the deaths occurred when houses, already weakened from recent monsoon rains, collapsed due to the force of the quake.

While rescue workers managed to reach many cutoff villages, Singh said it was still unclear what the final toll might be.

“There may still be villages where people are trapped under collapsed houses that we have not been able to reach,” he said.

By midday Monday, workers had managed to clear landslides from one lane of the main highway connecting Sikkim, and an initial convoy of 75 paramilitary soldiers had started moving toward Mangan, the village closest to the quake’s epicenter, officials said. They still had not arrived Monday evening.

In Gangtok, Sikkim‘s capital, police cordoned off the office of the state’s top elected official after the building was severely damaged in the quake, police Chief Jasbir Singh said.

Nepal’s government said seven people died there, including two men and a child who were killed when a brick wall toppled outside the British Embassy in the capital, Katmandu. Nearly 70 people were injured, some of them seriously, and were in hospitals across Nepal.

TV broadcasters showed footage of buildings buckled, sidewalks cracked and two major roads collapsed in Gangtok, 42 miles southeast of the quake’s epicenter. The Indo-Tibetan Border Police said two of its buildings collapsed in Gangtok.

In India’s West Bengal state, utility workers toiled through the night to restore power to a large swathe of the state which plunged into darkness after power lines were snapped by the quake.

The quake, which was followed by several aftershocks, was felt as far away as the Indian capital. It caused some houses in China’s Himalayan region of Tibet to collapse and disrupted a border county’s telecommunications services, Xinhua said.

The region has been hit by major earthquakes in the past, including in 1950 and 1897.

Read more: http://www.foxnews.com/world/2011/09/19/rescuers-in-helicopters-reach-himalayan-quake-villages/?#ixzz2Scpaendq

What is the ‘God Particle’? — Higgs Boson Explained

Physicist John Ellis talks about the subatomic particle that has taken the world by storm. CERN researchers have discovered the particle that gives all other matter its mass with the help of the Large Hadron Collider (LHC) in Europe.

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