The Bail-in

Last week’s nationalisation of the Netherlands’ fourth largest bank has raised the spectre of bank bail-ins once more.  A bail-in, as the name implies, is the opposite of a bail-out, and refers to dying banks being kept on life support by their customers rather than their taxpayers.

Having received a €750 million state bail-out in 2008, the Dutch Government lost patience with SNS Reaal on Friday and refused to throw good money after bad.  All the shareholders and junior bondholders have been wiped out, and finance minister Jeroen Dijsselbloem said that he did consider bailing in a proportion of SNS’s senior bonds and bank deposits too.  In the end he decided against it because of the potential negative effect that could have had on the remaining banks including ABN Amro, ING and Rabobank.

Denmark has already enacted and used bail-in legislation.  In 2011 the country’s regulator declared two smaller banks, Amagerbanken and Fjordbank Mors, insolvent and imposed losses on senior creditors and depositors with balances over the €100,000 compensation scheme limit.  Danish money markets reacted badly to the move at first and denied many of the country’s 120 banks access to wholesale funding for a period.

But Germany, the Netherlands and Finland are now pushing for the EU to speed up its plans for a Europe-wide bail-in directive.  They fear that countries who go it alone and enact national legislation before Brussels’ target of 2018 will be punished with higher bank funding costs, as investors demand compensation for the additional risks of lending to banks.

George Osborne also mentioned bail-ins briefly when he spoke at J P Morgan in Bournemouth on Monday.  Next time there’s a failure at a major high street bank in this country, he wants the government of the day to have a choice over whether have a taxpayer funded rescue or not.  Alastair Darling, of course, felt he had no choice in 2008.

What does this mean for local authority treasurers?  Well, the Treasury has just published the Banking Bill, the legislation for ring-fencing, retail depositor protection and bail-ins for the UK’s banks and building societies.  A recent paper clarifies that local authorities will be placed with other wholesale depositors at the top of the list for bail-ins and the bottom of the pile for payout in liquidation.  Respondents to last year’s mini consultation on the subject failed to provide any over-riding reasons for local authorities to be given the same preferential treatment as individual savers.  Treasury managers “will be more likely to have the resources to make multimillion pound investments on the basis of maximising return for a given level of risk” and are “at least as well positioned to monitor and manage risk as many other groups of senior unsecured creditors” according to HMT.

All this adds to the feeling that the long-term bank deposit is dead as a local authority investment.  If you’re looking for a fixed rate return higher than that paid by gilts or other local authorities, non-financial corporate bonds look a better bet than bank deposits.  But if you can take some variability of return, I’d be looking at the exceptionally wide range of pooled funds to provide with a good mixture of security, liquidity and yield.

David Green is Client Director at Arlingclose Limited.  This is the writer’s personal opinion and does not constitute investment advice.