EU directive should protect small deposits

Greek bank officials are quietly optimistic that if an agreement is reached between the government and the country’s creditors that will safeguard the country’s funding and its future in Europe, there will be no question of a haircut on bank deposits.

They note that the local banks have a problem of liquidity and not of capital. However, even if the capital adequacy of the country’s lenders is re-examined in the context of a new agreement, they expect that deposits below 100,000 euros will not be subject to a haircut.

The same sources stress that the European Union legislation is clear and explicitly protects deposits up to 100,000 euros, so that any violation of that rule would set a bad precedent as far as the credibility of the Eurosystem is concerned.

Senior credit sector officials acknowledge that the existing European legislation was drawn up to deal with a default by one or more banks but not for a country’s entire banking system. If the European Central Bank, as the banking watchdog, determines that the rapid deterioration of financial conditions and soaring nonperforming loans require a new extensive recapitalization of all lenders, then no unorthodox solutions could be ruled out. Nevertheless, they estimate that it is more likely that an extraordinary tax would be imposed, based on the level of deposits, rather than a direct haircut.

The head of the Hellenic Bank Association and the National Bank of Greece, Louka Katseli, told journalists that the issue of a deposit haircut has not been raised, adding that since January 1, 2015, the Eurosystem has been covered by the European directive that guarantees all deposits up to 100,000 euros. She also noted that in the event of an agreement with the creditors, preparations have already been made for bank branches to start conducting most of their regular operations as of Tuesday.

Bank sector professionals say there are three ways for a bank to deal with a solvency problem if it does not have the capital that renders it sustainable. The first is recapitalization, which was already implemented in 2013 with the investment of 50 billion euros. The second is the shutdown and liquidation of a bank, in which case depositors are covered by the banks’ special fund that guarantees deposits up to 100,000 euros. However, this cannot be used for all four systemic banks as the fund only has 2 billion euros. The third method is the streamlining of banks, a tool that has various versions. One of these provides for the breakdown of a bank into a healthy and an unhealthy part, with deposits going one way and bad loans the other. Another version is the so-called bail-in with the participation of all depositors, although the European directive is meant to protect deposits below 100,000 euros.