Europe Banks – Bail-in
Today I will talk about news with the European Banks with information provided by the blog Dealbreaker.com written by Matt Levine.
Europe has been a hot topic for a while. With new technology and the financial crash in 2008 people are noticing just how sensitive markets are. Notice that in the past news about Greece would affect stock prices in the United States and all over the world. This affects project finance too because investors are pulling all of their money out risky investments and moving to safer alternatives.
In the article Europe Will Try To Make Its Banks’ Creditors Play Nicer With Each Other explains “bail-in”.
the best way to preserve value not only for the enterprise but also for the creditors is to write down some of the debt to allow the company to continue as a going concern that can pay off the rest of the debt.
This is why we have bankruptcy, but bankruptcy seems to be too slow and scary for banks. The worry is, you have a bank and it’s got like $15 of equity and $100 of debt and its assets go from $115 to $90 and all of the debt holders start looking at their watches and being all “hey this has been fun but I’m actually late for this thing so would it be too much trouble for you to give me my money back?” and the bank has to sell a bunch of stuff to meet those demands…
This causes banks to operate at lower level and loss lager amounts of capital which has a ripple affect on markets all over the world.
The article explains 3 ways to make a bail-in work.
(1) insured deposits (obvs),
(2) secured liabilities to the extent of security, including repos and stuff (also obvs), and
(3) liabilities with an original maturity of less than one month, which, much less obvs, but you can see the point of it, which is basically that banks fund cheaply
Hopefully this system works and stocks continue to rally like today.
http://dealbreaker.com/2012/03/europe-will-try-to-make-its-banks-creditors-play-nicer-with-each-other/VN:F [1.9.22_1171]VN:F [1.9.22_1171]