Councils prepared ahead of banking crisis speculation

Councils are now better placed to withstand a future banking crisis thanks to heeding warnings over bail-in risk, according to a leading local treasury adviser amid tumbling bank share prices.

Deutsche Bank shares plunged on Thursday after a rally the previous day caused by reports it was considering buying back several billion euros of debt.

Experts attributed the fall in Deutsche shares to worries over contingent convertible bonds (known as cocos), investors in which could be forced to “bail-in” to support banks if they get into hot water.

Meanwhile, the values of UK banks continued to fall, with HSBC and Lloyds shares down 21% and 22% respectively since the start of the year.

However,  David Green, client director at treasury adviser Arlingclose, said: “Some of the recent market concern over Deutsche and other banks reflects a growing awareness among investors that governments will not bail out failing banks in future, but will bail-in large depositors instead.

“Bail-in is not news to us or our clients, and we have been helping local authorities move towards bail-in exempt investments for some time now, as a precaution should another banking crisis arise.”

Green also suggested that councils should not rule out the possibility of such an event occurring again.
“It is eight and a half years since the run on Northern Rock, after all, and these things do tend to go in cycles,” he said.

Meanwhile, Lord Hill, the EU commissioner for financial services, told the Financial Times that it would be “a bit of a stretch to put any change in global sentiment towards the banks in recent days down to [European bail-in legislation], given that it has been known about now for over 18 months”.

This week, John Mack, the former chief executive officer of Morgan Stanley, said that Deutsche Bank’s status as Germany’s biggest lender should give investors confidence in its ability to pay interest on debt.

He told Bloomberg Television: “This idea that I heard yesterday, the possibility of not making their interest payments, it’s just absurd. The government will not let that happen.”

Deutsche Bank had €2.87bn-worth of convertible bonds at the end of 2014, with some now trading at 77pc of their face value.

Photo Elliott Brown, Flickr.