Bank rescues such as Banif and BES caused losses for shareholders and bondholders, but who now must pay the bill when the next bank goes bust?
As of January 1st this year, investors and depositors of large amounts may well be part of any future bank rescue.
In the past two years we have seen BES and Banif go bust. In these two rescue operations it was the shareholders and bondholers who lost money. But under new rules, depositors with more than €100,000 in the bank also may be called on to stem losses and boost the capital of a failed bank.
Shareholders, bondholders and depositors all may be asked to foot the bill, contrary to what happens at present, under the new rules in "Guidelines for Recovery and Banking Resolution" where big depositors may be called on to take responsibility if there is another Banif.
Only deposits of less than €100,000 are protected. All others, shareholders and bondholders, may have to help to offset losses of their institutions before taxpayers are called on to rescue a failed bank.
The aim is to reduce the value of public intervention in the banks, so that taxpayers' money is used only after all other possibilities have been exhausted. Has Banif been sold off after January 1st, 2016, the Portuguese taxpayer could have been around €4 billion better off.
Equity holders, namely the shareholders, are the first to lose money. The "owners" of the bank are called to account for the losses at their institution. Investors could lose their entire capital invested.
These new rules made it imperative for the Bank of Portugal to sell Banif before then end of last year, however bad the deal with Santander proved to be for the taxpayer who now is funding the whole process and guaranteeing future losses.
The advice now is to keep less than €100,000 in any one bank and ditch any shares held in Portugal's banks.
Comments
A similar principle is the ceteris paribus equality of risk of all shareholders written into all Portuguese bank contracts in mimicry of the UK's equivalent contracts. But breached the other day in the BANIF settlement for signatories of the Portuguese contracts. The British law contract holders being protected in the certain knowledge that under UK law there is no doubt that the ceteris paribus equality of risk of all shareholders applies.
The first call to protect a failed banks small depositors would be other Portuguese banks. If they could not - or more likely would not - make up the necessary amounts then it would be the Portuguese tax payer adding the expense to all their other billions of debt.
We must be clear that there is nothing Portugal has done to put its own house in order. That is in stone. Indeed it has been discreetly rolling back on Troika recommendations to get votes. But future generations must still pay - whether Portugal is still in the euro or not.