LONDON: If the bailout of Cyprus is a template for European rescue deals it marks a "game-changer" for banks that could raise funding costs, see deposits shift more quickly and delay the prospect of higher dividends.
Europe signalled this week that large depositors would shoulder part of the cost of future bank bailouts after savings over 100,000 euros were targeted in the Cyprus rescue package. That sent bank share prices falling and pushed up the cost of insuring bank debt against default.
"Bail-in is thus replacing bail-out. As a consequence, the cost of bank funding will increase, bank deposits will become less sticky, and banks must hold more equity capital to reassure their creditors," said Nick Anderson, analyst at Berenberg.
"The elephant in the room has been spotted at last." Jeroen Dijsselbloem, head of the Eurogroup of euro zone finance ministers, said on Monday that in future, the currency bloc should first ask banks to recapitalise themselves, then look to shareholders and bondholders and then "if necessary" to uninsured deposit holders.
"Now that the crisis is fading out, I think we need to dare a little more in dealing with this," he said. In addition to big depositors, senior bondholders in Cyprus's second-largest bank, Laiki, will be wiped out and holders of senior paper in the largest lender, Bank of Cyprus, will also be hit.
In previous packages for Greece, Ireland, Portugal and Spain, leaders were unwilling to force losses on either senior bondholders or savers for fear of prompting flight from banks across the region.
Under new EU regulations, senior bondholders would bear part of the cost of future bank bailouts but that provision is not due to be enforced before 2015.
Non-eurozone member Denmark is the only EU state to impose losses on senior bondholders in recent years, but after its banks were shut out of debt markets in 2011 it has moved to limit the likelihood of such losses.
Europe's banking index was down nearly 0.6 percent by 1310 GMT, adding to a 1.9 percent fall on Monday and putting it on course for a fourth successive daily fall.
Banks in Italy and Spain, two countries at the heart of the euro zone crisis, were among the biggest fallers with UniCredit and Spain's BBVA down over two percent. Italian regional lender Banca Carige had slid over three percent.
The cost of insuring European banks' senior bonds against default rose, with the Markit iTraxx senior financials index widening 14 basis points to 181.
The index for subordinated bonds - riskier as they rank behind senior debt if a bank is wound up - widened 20 basis points to 302 basis points.
Critics of the action on Cyprus said it had re-established the link between weak banks and weak sovereigns and could scare depositors, but others said it was long overdue.
indiatimes.com
Europe signalled this week that large depositors would shoulder part of the cost of future bank bailouts after savings over 100,000 euros were targeted in the Cyprus rescue package. That sent bank share prices falling and pushed up the cost of insuring bank debt against default.
"Bail-in is thus replacing bail-out. As a consequence, the cost of bank funding will increase, bank deposits will become less sticky, and banks must hold more equity capital to reassure their creditors," said Nick Anderson, analyst at Berenberg.
"The elephant in the room has been spotted at last." Jeroen Dijsselbloem, head of the Eurogroup of euro zone finance ministers, said on Monday that in future, the currency bloc should first ask banks to recapitalise themselves, then look to shareholders and bondholders and then "if necessary" to uninsured deposit holders.
"Now that the crisis is fading out, I think we need to dare a little more in dealing with this," he said. In addition to big depositors, senior bondholders in Cyprus's second-largest bank, Laiki, will be wiped out and holders of senior paper in the largest lender, Bank of Cyprus, will also be hit.
In previous packages for Greece, Ireland, Portugal and Spain, leaders were unwilling to force losses on either senior bondholders or savers for fear of prompting flight from banks across the region.
Under new EU regulations, senior bondholders would bear part of the cost of future bank bailouts but that provision is not due to be enforced before 2015.
Non-eurozone member Denmark is the only EU state to impose losses on senior bondholders in recent years, but after its banks were shut out of debt markets in 2011 it has moved to limit the likelihood of such losses.
Europe's banking index was down nearly 0.6 percent by 1310 GMT, adding to a 1.9 percent fall on Monday and putting it on course for a fourth successive daily fall.
Banks in Italy and Spain, two countries at the heart of the euro zone crisis, were among the biggest fallers with UniCredit and Spain's BBVA down over two percent. Italian regional lender Banca Carige had slid over three percent.
The cost of insuring European banks' senior bonds against default rose, with the Markit iTraxx senior financials index widening 14 basis points to 181.
The index for subordinated bonds - riskier as they rank behind senior debt if a bank is wound up - widened 20 basis points to 302 basis points.
Critics of the action on Cyprus said it had re-established the link between weak banks and weak sovereigns and could scare depositors, but others said it was long overdue.
indiatimes.com
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