ECB Recommends EU-Wide Preferred Status for Bank Deposits; Positive for Depositors, Negative for Some Senior Creditors

I copy/paste a part of a very interesting analysis by Moody’s regarding the proposed amendments in the national insolvency hierarchies.

Last Thursday, the European Central Bank (ECB) recommended applying a uniform approach to depositor preference across the European Union (EU), amending current national insolvency hierarchies. The ECB proposes that all classes of EU deposits be “preferred” to other senior unsecured creditors in a bank insolvency or resolution, including junior depositors such as financial institutions, public authorities and large corporates. EU-wide preferred status would be credit positive for depositors in EU states that currently do not give preference to such junior depositors, which is most states, but would be credit negative for some senior creditors.

The ECB’s recommendation reiterates its earlier views and responds to the European Commission’s (EC) proposal to introduce a new class of non-preferred junior-senior unsecured bonds in all EU state creditor hierarchies to absorb losses after capital and existing subordinated bonds, but before other senior unsecured liabilities. The new bonds would enhance banks’ ability to issue suitable loss-absorbing liabilities that resolution authorities could effectively bail in to facilitate the application of the minimum requirement for own-funds and eligible liabilities (MREL) and the subordination requirements under the total loss-absorbing capacity (TLAC) requirement.

The ECB believes that a common EU creditor hierarchy (particularly within the Single Supervisory Area) would improve the integration of financial services within the EU banking union. The new securities would also enhance banks’ resolvability since unsecured bank debt instruments would bear losses ahead of operational liabilities and creditors would have much greater certainty over the claim hierarchy.

Full report

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