Date: 9th December 2016

Following the 2008 financial crisis and the extremely damaging ensuing bailout of several financial institutions, governments decided it was no longer up to taxpayers to foot the bill of mismanaged banks  (“bail-OUT”, meaning by OUTsiders), and to move to a “bail–IN” approach (making “INsiders” pay instead). This led to the EU BRRD (Bank Recovery and Resolution Directive) entering into force on 1 January 2016, but already de facto applied as early as December 2013 in several Member States including in the case of  the top 5 Slovenian banks.

“Heads I win, Tails you lose “

The BRRD states that when rescuing a failing bank, competent Authorities should ensure that it is “creditors” of the bank that foot the bill:

  • First make all shareholders pay by wiping out part or all of their investment without any distinction being made between insider /professional investors and non-insider retail ones.
  • The next creditors to be called upon are the subordinated bond holders, then senior bond holders, once more without distinguishing between insider/professional bond investors and retail ones (typically retail bank clients who were sold these securities at the bank counter)
  • Lastly other lenders and depositors can be called upon if necessary.

The BRRD thus excludes the main insiders and principal people responsible for bank failures: the top executives and managers of the failed banks. BRRD indeed does not call for any clawback on top remunerations and bonuses of the persons who are primarily responsible for these failures and are the top “insiders”. For example, in June 2008, managers at Lehman Brothers were granted $5 billion in performance bonuses, a few months before Lehman filed for bankruptcy. Not one cent of these bonuses was ever paid back. “Heads I win, tails you lose” seemed to be the principle on which bank resolution operated back then, an approach that is now being endorsed by the misleadingly named EU “bail-in” approach. Why is it that the primary persons responsible for bank failures are not only conspicuously absent from the very top of the list of the “bail-inable”, but are actually completely absent from the list?

The case of the bail-in of Slovenian banks: the harshest and most unfair to non-insider investors to-date

On the other hand, to add insult to injury, the actual implementation of bail-in – especially in the case of the six top Slovenian banks – is hitting non-insider retail investors very hard, and does not give them a fair chance to recover their damages after seeing their savings in subordinated bonds of those banks totally wiped out without recourse.

Let’s briefly summarise the astonishing case of NLB, the bail-in at the biggest Slovenian bank that has gone largely unmentioned by European media:

In November 2013, the bank’s published financial statements disclosed positive net equity of + € 835 million but soon after, in December 2013, the “asset quality review” (AQR) requested by the European Central Bank evaluated net equity at minus € 318 million. Too bad for retail bank investors who trusted the bank’s financial statements… a painful reminder of the 2011 stress tests performed by the European Banking Authority which in the case of Cypriot banks did not identify any solvency issue at all, leading to their collapse about a year later at the expense of non-insider depositors.

No transparency for non-insider creditors

To date, NLB and the Central Bank of Slovenia have refused to disclose any information to non-insider bond investors regarding this “AQR”, and this despite a legally binding order by the Slovenian Information Commissioner to do so. When non-insider bond investors complained and the Slovenian police was sent in to investigate this case, ECB chair Draghi wrote to the Slovenian prosecutor to protest against the seizure of ECB documents by the police!

The disclaimers contained in this AQR were nevertheless far from reassuring as far as  quality is concerned: (i) the valuations were performed disregarding all standards, (ii) based on a limited sample of banks’ portfolios as chosen by the BoS, (iii) based on further instructions provided by the BoS, (iv) Deloitte holds no responsibility for possible damage to third parties resulting from this AQR, and (v) notwithstanding, Deloitte notes that the valuations are « to be considered an exercise only ».

And on 10 November 2016, the Slovenian Audit Court also found that:

  • the criteria for the selection of non-performing loans and their re-valuation used for the transfer to the Bank Asset Management Company in December 2013 were "neither clearly determined nor consistently followed";
  • the bank "failed to establish an appropriate auditing track that would ensure the transparency of the transfer process",
  • the bank's available documentation "fails to reveal who was responsible for the decision-making in the re-valuations”.

More generally, independent academic researchers and BETTER FINANCE1 had already pointed out the very low transparency of bank supervision activity in the EU compared to the US2. But retail investors and depositors must mostly, if not only, rely on communication from Public Supervisors, as they do not have the time or the expertise of professional creditors. They are therefore the least well-placed with regard to assessing their bank’s risk of failing.

Disregard for the legal rights of retail investors

Despite all the talk about the public focus on investor protection, the acts of the central bank of Slovenia and of the ECB (see above) point to the contrary.  Indeed the Bank of Slovenia argued that it was forced to trigger this bail-in by the EU (referring to EU guidelines from the 1st of August 2013) and subsequently changed the Slovenian banking law to allow for the forced expropriation of subordinated bond holders. After years of costly legal complaints from the Slovenian Investor Association VZMD3, the European Court of Justice recently ruled that the 2013 EU guidelines were indeed only guidelines and not mandatory. Then the Constitutional Court of Slovenia ruled that the revised banking law indeed violates the investors’ rights to effective judicial protection.

But, three years after the “bail-in”, and despite these rulings, retail bank investors in Slovenia are left with the burden of proof, without any transparency from the banks and central banks, and are saddled with legal fees in attempts to recover damages… unlike other bail-in cases to date where retail bond holders have all been, at least partially, indemnified.


[1]Improvement  EU  banking  supervisory  transparency absolute necessity in light of bail-in rules”, BETTER FINANCE press release; 24 may 2016

[2]The European Union Continues to Lag on Banking Supervisory Transparency", by Christopher Gandrud (Hertie School of Governance), Mark Hallerberg (Hertie School of Governance) and Nicolas Véron (PIIE); May 10, 2016

[3]  More details on this case on the VZMD and BETTER FINANCE websites:"Bail-in: how far does it have to go?"