Following the ECB’s package for banking supervision in the Eurozone, announced in early October, and in particular since the “bail ins” of bank bondholders, the Bank of Italy said this week that Italian cities’ human rights could be at risk if the European Union forces subordinated bondholders to take losses or convert their holdings to prop up distressed banks. On its Financial Stability Report the Bank of Italy objects to the rule according to which a bank determined to have a capital shortfall has to raise capital, and if it can’t do so on its own, the subordinated debt may be converted to equity as a condition for the bank to access state aid. According to the Bank of Italy, this conversion of bonds into equity or the writedown of debt instruments have to respect the rights of the creditors and shareholders and thus the Charter of Fundamental Rights (see article 17) as well as the European Convention on Human Rights. This means ‘there must be a real and immediate threat to financial stability and not a merely hypothetical scenario, such as that produced by a stress test’.
The President of the Italian Banking Association, Antonio Patuelli, also stressed the need for changes to the “perplexing” European banking supervision rules as “prevention is better than such medicine”. One may wonder if the Bank of Italy’s position can open the door to the discussion on Europe’s banking union in terms of human rights and how this debate can influence the developments from this summer.
Along the same line, bondholders in Greece followed a similar reasoning when, following the sovereign debt restructuring in Greece in 2012, EU investors incurred losses due to the exchange of Greek government bonds. They filed a claim under the European Convention on Human Rights (see articles 14 and 15 and article 1 from the Protocol no. 1) at the European Court of Human Rights on the basis that their rights to property had been violated as a result of the arbitrary retroactive triggering of the Collective Action Clauses’ by the Greek government.
Please read The Wall Street Journal article here.