EU “bail-in” rule confirmation could create more headaches for global banks
When the European twin financial crises – centered around sovereign debt and liquidity in the banking sector – arrived on the shores of Cyprus several months ago, few could have predicted the sharp turn officials from the European Central Bank (ECB), the International Monetary Fund (IMF) and the European Commission would impose upon the country's government. Within days, many depositors at the two largest Cypriot banks received haircuts on their accounts and have since been prevented from withdrawing or transferring their funds.
These capital controls represented the next stage in Europe's economic maelstrom and many observers – including those in countries currently engaged in ECB/IMF assistance programs – feared at the time that these rules would become the standard policy. Comments from figures like Jeroen Dijsselbloem, head of the Eurogroup of national finance ministers, indicated that it was a real possibility. According to The Telegraph, a U.K.-based news source, this speculation has been confirmed by Dijsselbloem in a recent press conference, who said that the so-called "bail-in" would now become the first line of defense against banking sector turmoil.
"This is a clear signal to the markets and citizens, and another major step forward towards a banking union," he said on June 27. "If a bank gets in trouble we will now, throughout Europe, have one set of rules on who pays the bill. The financial sector itself will now to a very, very large extent become responsible for dealing with its own problems."
What does this mean for investors? A lack of confidence in the banking sector makes it harder for those institutions to do business. If major banks begin to flounder and are forced to impose losses on depositors, the risk of system-wide bank runs increases. Simply put, these are fertile grounds for risk volatility to swell.
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