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ECB admits mistake in handling Cyprus

Draghi said an initial pact that would levy a tax on deposits was a mistake

Gulf News

If the European Central Bank faces any blame for last month’s botched bailout of Cyprus, Mario Draghi was determined not to acknowledge it on Thursday. But the president of the ECB did say there were urgent lessons to be learnt on the need to specify a “pecking order” of assets that could be raided to fund future rescues.

Draghi said an initial agreement between Eurozone finance ministers, Cyprus and the ECB that would have levied a tax on insured deposits below 100,000 euros was a mistake.

“That was not smart, to say the least, and was quickly corrected,” he said at a monthly news conference. He added explicitly: “Cyprus is no template, Cyprus is no turning point in euro policy.”

However, he did raise the question of “bailing in” depositors when a bank becomes insolvent, a subject that came into sharp relief in Cyprus where the two major banks had few bondholders and large deposit bases.

“We have to be able to resolve banks without using taxpayers’ money and without disrupting the payment system,” the ECB chief said. “We should ask the question what makes a bail-in a problem? Well, a bail-in by itself is not a problem. It’s the lack of rules, ex-ante rules known to all parties, [the lack of] which can make a bail-in a disorderly event.

“And it’s the lack of buffers, capital buffers or other bail-inable asset buffers which may make a bail-in a disorderly event.”

Since implementing its revised plan, which involves winding up Laiki, the biggest bank, and forcing large losses on uninsured depositors, Cyprus has had to enact capital controls to prevent an all-out bank run.

Draft European legislation that would have the power to force losses on bank investors needs to come into force by 2015, rather than 2018 as currently planned, Draghi said - a position also held by Germany, Finland, the Netherlands and Denmark. The European Commission’s draft bank recovery and resolution directive sets out a pecking order for shareholders, bondholders and uninsured depositors in the event of a bank collapse.

“If you can, you wouldn’t touch insured deposit holders,” Draghi said, but added that the current draft of the legislation failed to make an explicit distinction between uninsured depositors and senior debt, unlike US rules set by the Federal Deposit Insurance Corporation.

“One wants to make sure that the same distinction is going to be present in the commission draft directive. That’s another lesson we draw from Cyprus,” he said.

Under separate so-called “banking union” plans in the Eurozone, the ECB is set to take over supervisory responsibility for major banks from next year. Draghi said Cyprus highlighted how this was “absolutely essential”.

“There is no better way to prevent this crisis than shedding light on the situations of the national banking systems than through this international oversight,” he said. “It was the same situation in the previous cases, in Ireland, in Spain, in Greece and as it is today in Cyprus. So any delay on this front is extremely disappointing.”

Since it was crucial that banks have assets to bail in the event of a collapse, regulators should also take a view on the relative sizes of their funding bases to prevent a situation like Cyprus where too much was concentrated as deposits, he said.

— Financial Times