At the time of writing the Court of Justice of the European Union (CJEU) in Luxembourg is still examining the legitimacy of the 2013 decision by the Bank of Slovenia to expropriate all holders of subordinated bonds and shares in recapitalised Slovenian banks.
Although few refer to it as such, the wiping out of shareholders' capital and subordinated bonds as part of the central bank's recapitalisation of the three largest banks in the country amounts to what is now commonly known as a bail-in.
Bail-in rules for Eurozone banks are part and parcel of the Bank Recovery and Resolution Directive (BRRD) and are designed to stop taxpayers from having to foot the bill for saving banks from bankruptcy. Instead, bail-in rules will oblige private shareholders and depositors to automatically bear losses equivalent to 8% of the bank's liabilities before any public support can be made available to bail them out. However, and lest we forget, individual investors and depositors are also taxpayers.
Considering that the BRRD is due to come into force on the 1st of January 2016, the Slovenian case is getting surprisingly little attention in the international press, even though Slovenian bondholders are not giving up without a fight, first taking the case to the Constitutional Court of the Republic of Slovenia and then all the way to the CJEU.
The Constitutional Court of the Republic of Slovenia found that the expropriation of bondholders by the Bank of Slovenia entailed “a severe violation of existing entitlements thus contradicting the principles of legitimate expectations” and questioned “whether such drastic violation of private property is truly proportionate to the public benefit pursued by the measures”.
Slovenia’s Finance Minister has defended the measures by referring to the fact that under EU state aid rules public funds can only be redirected to recapitalise banks after existing shareholders and holders of subordinated debt participate in the restructuring. These bail-in amendments to the Slovenian banking act are now being challenged on multiple grounds by VZMD, the Pan Slovenian Shareholders' Association and member of BETTER FINANCE.
Since the BRRD is not due for transposition into national law until 2016, as stressed by VZMD and other representatives of expropriated bondholders, Slovenian authorities insist instead on the binding nature of the Banking Communication by the European Commission “on the application, from 1 August 2013, of State aid rules to support measures in favour of banks”. VZMD states that the ‘Banking Communication’ of the European Commission was suddenly deemed binding (only in Slovenia and only at that time) and conveniently interpreted as to justify the wholesale cancellation of all subordinated bonds in all recapitalised banks. The matter is now in the hands of the CJEU who will be investigating the claim by the Bank of Slovenia that the Banking Communication is binding and that the legal provisions in question are merely enacting these rules.
According to VZMD, authorities also resorted to a number of blatant falsehoods about the extent of the supposedly catastrophic predicament of Slovenian banks in December 2013 in order to defend the expropriation. To the same end, the dismal macroeconomic situation was also significantly exaggerated, even though, as early as 4 December 2013 and just a couple of weeks before the official statement announcing the expropriation, an official statement was published on Eurostat announcing that the quarterly GDP of Slovenia remained stable.
The European Commission’s DG Competition has not been spared of criticism either as evidence emerged of pressure by a minor EC official to implement a complete wipe-out of all subordinated bonds as the precondition for him to forward the case to his superiors and recommend state aid to be granted.
With the implementation of the BRRD looming on the horizon, the Slovenian case highlights the many issues remaining to be addressed on the path towards an effective banking union.
Banking resolutions that don’t respect the rights of individual investors and depositors carry significant social costs. Since the onset of the financial crisis, individual savers and investors have borne the brunt of these costs. Not only are they paying for bailouts in their capacity as taxpayers, they are also suffering losses due to financial repression and negative returns on bank savings.
Adding insult to injury, depositors will from now on be put on the front-line and "bailed-in” by having part of the debt they are owed written off in order to rescue the borrowing institution. This is unacceptable and needs to be addressed as a matter of priority in the further development of the Banking Union. At the very least, assurance should be given that the bail-in of depositors is a measure of last resort.
Above all the Banking Union should continue to tackle what can only be described as the “privatisation of profits and socialisation of losses” by reforming “bail-in” rules to ensure the parties responsible for bank failures are the first to pay for resolutions instead of depositors and savers.
It’s a perverse system that would see savers and depositors pay instead of the parties responsible for bank failures, such as bank executives and supervisors.