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2018 | OriginalPaper | Chapter

4. The Bail-in Effect: How the Cost of Funding Through Bonds has Changed After the Introduction of the BRRD

Authors : Fabrizio Crespi, Danilo V Mascia

Published in: Bank Funding Strategies

Publisher: Springer International Publishing

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Abstract

By employing data from a unique hand-collected dataset, in this Chapter we show that, since the adoption of the BRRD in the European Union, Italian banks—probably motivated by the need to increase the appeal of their bail-inable debt instruments—have been forced to offer higher yields (compared to the yields offered by government securities with corresponding maturities) to bondholders, with the consequence of an increase in their cost of funding. Finally, we conclude this final Chapter by offering some very recent examples about the application of the BRDD rules in Italy—which have either led to liquidation, resolution, or precautionary recapitalization cases—and the related side effects generated to bank bondholders.

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previous chapter The Different Types of Bonds Issued by Italian Banks: An Overview

In Italy, the Resolution Authority is the Bank of Italy.

The Directive is available at the following link: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014L0059.

Note that, the BRRD together with the 2013 Capital Requirements and Regulation Directive (CRD IV—i.e., Basel III) and the 2014 Deposit Guarantee Scheme Directive (DGSD) form the so-called “Single Rulebook”, which is the name associated to the rules governing the EU financial sector.

Note that when certain liabilities are excluded from the bail-in, the resolution authority may increase the write-down of other bail-inable liabilities. However, this is only possible if the losses suffered by the bailed-in creditors do not exceed the losses they would have borne in case the financial institution was put under liquidation. This is the so-called “no creditors worse off than under liquidation” (NCWOL) principle that resolution authorities need to keep in mind when applying resolution tools.

Just to offer an example, think of the Latvian bank run occurred at the Swedish-owned Swedbank, in December 2011, due to uncontrolled depositors’ panic. See, in this regard, ‘Panic fuels Latvian run on bank’, BBC, December 12, 2011, available at: http://www.bbc.co.uk/news/business-16142000.

Note that, as suggested by Sironi (2003), we also avoid considering the secondary market because of the poor liquidity characterizing the majority of the (unlisted) bonds in our investigation.

More precisely, almost 72% are fixed rate, and about 11% are step-up bonds; the remaining are floating.

See also Chap. 2 for an analysis of Italian banks funding strategies.

To this purpose we employ the so called “Rendistato”—provided by the Italian central bank (Bank of Italy)—which is the weighted average yield on a basket of Government securities, provided for different maturities. More information is available at the following link: https://www.bancaditalia.it/compiti/operazioni-mef/rendistato-rendiob/index.html?com.dotmarketing.htmlpage.language=1.

See also, in this regard, the considerations provided in Chaps. 2 and 3.

Unreported t-tests show that the two subsample means, of our ‘spread’ variable, are statistically different.

See also Chap. 2 in this regard.

These banks accounted for about 1% of the Italian banking system; see, for instance, Bank of Italy (2015).

Note that the deposit insurance schemes in Italy are not funded with money from the Government; rather they collect contributions from their members.

DG COMP is the acronym of “Directorate-General for Competition”, a Body of the European Commission that is responsible for implementing a coherent competition policy—under the framework of the so-called state aid rules—within the European Union common market.

Interestingly, the four “good banks” were later sold for just one euro each to UBI Banking Group and BPER.

The Italian Resolution Fund is funded (via ex-ante contributions) through sources from the Italian banking industry. Provided that the Fund did not have enough sources for the resolution of the four banks (as it was only recently settled), in order to avoid an intervention by the Italian Government—as the bail-out was no longer possible—the required sources were anticipated by three of the largest Italian banks (i.e., Unicredit, Intesa Sanpaolo, and Unione di Banche Italiane). Therefore, in 2015 the ex-ante (ordinary) contributions amounted to 588 million Euros, whereas the extra contributions from the three large banks reached 175 billion of Euros.

The news received great attention worldwide. See, for instance, ‘Italy bank rescue marred by suicide and lost savings’, BBC, December 10, 2015, available at: http://www.bbc.com/news/world-europe-35062239.

For the sake of precision, a preceding rescue occurred in Italy in July 2015 with the liquidation of Banca Romagna Cooperativa (BRC). However, this episode was almost disregarded, probably because retail bondholders did not suffered any loss thanks to the refund they received from the “Fondo di Garanzia Istituzionale”, which is the Deposit Insurance Scheme financed by Italian cooperative banks (World Bank Group 2016b).

State aid was approved by the European Commission on June 25, 2017, to facilitate the liquidation of the two banks. Indeed, such a decision followed the announcement of the ECB that the two banks were failing or likely to fail (FOLTF), and the subsequent decision by the SRB that there was no public interest in resolving the two banks. See the official press release by the European Commission at the following link: http://europa.eu/rapid/press-release_IP-17-1791_en.htm.

Criticisms on this issue were raised by foreign media. See, for instance, ‘Italy’s Latest Bank Bailout Has Created A Two-Speed Eurozone’, Forbes, June 26, 2017, available at: https://www.forbes.com/sites/francescoppola/2017/06/26/italys-latest-bank-bailout-has-created-a-two-speed-eurozone/#6424086144a4.

Indeed, the European Commission approved, under EU rules, Italian measures to facilitate the liquidation of Banca Popolare di Vicenza and Veneto Banca under national insolvency law. These measures involved the sale of some of the two banks’ businesses (for the token price of 1 Euro) to be integrated into Intesa Sanpaolo.

State aid in the form of capital injection was authorized on July 4, 2017. See the official press release by the European Commission at the following link: http://europa.eu/rapid/press-release_IP-17-1905_en.htm.

And, obviously, it is in line with the scope of the BRRD.

And, in fact, the BRRD itself allows a government intervention as a last resort possibility. Moreover, the BRRD framework is forcing banks to have a sufficient amount of bail-inable instruments (MREL). In this regard, see also Chap. 1.

In this regard, however, we hope that the new rules introduced by MiFID II about Product Governance will avoid, in the future, such unfair and misleading type of selling.

Arnaboldi, F., 2014. Deposit Guarantee Schemes. A European Perspective. Palgrave Macmillan, London.

Bank of Italy, 2015. Information on resolution of Banca Marche, Banca Popolare dell’Etruria e del Lazio, Carichieti, and Cassa di Risparmio di Ferrara crises. Available at: https://www.bancaditalia.it/media/approfondimenti/2015/info-soluzione-crisi/info-banche-en.pdf?language_id=1.

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Title: The Bail-in Effect: How the Cost of Funding Through Bonds has Changed After the Introduction of the BRRD
Authors: Fabrizio Crespi
Danilo V Mascia
Publisher: Springer International Publishing
Book: Bank Funding Strategies
Print ISBN: 978-3-319-69412-2

Electronic ISBN: 978-3-319-69413-9

Copyright Year: 2018
DOI: https://doi.org/10.1007/978-3-319-69413-9_4