Greek bank-failure law puts big deposits at risk, Moody’s says

Greece’s new bank-failure law puts uninsured depositors at risk because it ranks them below state claims in an insolvency or resolution, according to Moody’s Investors Service.

The Greek law passed last week as a precondition for further bailout talks transposes the European Union’s Bank Recovery and Resolution Directive. It differs from the rules in other EU countries, however, in that “Greek state deposits together with all state claims” would take losses only after deposits of more than 100,000 euros ($111,000), Moody’s said.

Under BRRD, a lender can be sold, a bridge institution can be created, or good and bad assets can be separated from each other and assigned to different entities. These measures can be used alone or in combination and are available immediately. A bail-in tool becomes available on Jan. 1.

“Once the bail-in tool becomes effective in 2016, the more senior ranking of state claims would negatively affect recovery rates for Greek wholesale depositors,” analysts Nondas Nicolaides and Bernhard Held wrote in the ratings firm’s CreditOutlook on Monday.

Greece last week rushed bank-resolution legislation through parliament as one of the steps it must take to open talks on its 86-billion-euro bailout package, as much as 25 billion euros of which are earmarked for recapitalizing the banking system.

The law is “credit negative” for bondholders and uninsured depositors because of the limits on using public funds for bank resolution and because of the burden-sharing for all unsecured creditors starting next year, Moody’s said.

This timeline “could facilitate the carve-out of uninsured deposits” if bank recapitalizations occur this year, as Finance Minister Euclid Tsakalotos told lawmakers in Athens.

Nonperforming loans are likely to rise to “well over 40 percent” of banks’ loan books this year, from 35 percent at end-2014, the analysts wrote. While the Greek banks have an average common equity Tier 1 capital ratio, a measure of financial strength, equivalent to 12.8 percent, more than half of that is in deferred tax assets, Moody’s said.

[Bloomberg]