A few weeks have passed after the Government rescued the four banks which risked insolvency and from January 1 will be introduced the rule on bail in banking, i.e., on the internal saving from the risks of default at the expense of the shareholders and bondholders. Perhaps we need to reflect seriously on what it means.
Let us depart from the notion of bail in (internal rescuing) in opposition to the procedure of bail out (external rescuing) which usually implies the use of public money. This second method, previously used to prevent the crack of the banking system, has been at the base of financial troubles in entire nations in the past, from Iceland to Cyprus, but also in Spain and Slovenia. These are the reasons why this time an internal system of rehabilitation has been chosen, which is supposed also to make the shareholders and creditors of the banking institutions more responsible.
As lavoce.info aptly describes, if a credit institution were to enter a state of crisis, the supervisory authority (Bankitalia for smaller banks, and the Single Resolution Board for larger banks and international groups located in the Eurozone) will assess whether to declare insolvency and sell it off (in Italy, through the procedure of liquidation) or make a “Resolution”. The decision to this regard will be then taken by assessing whether the crisis threatens or not the stability of the financial system.
Bail in is not yet another tool to be used for this “resolution”. It works in such a way as to make the “creditors pay the Bank’s losses”. For example, if the bank needs to have assets of +10 in order to keep working and has a deficit instead (i.e., an active lower than the debts) of – 100: Shareholders will be eliminated; the rights of the creditors will be reduced by 100, according to their order of satisfaction (from the subordinate ones to those who have more warranties), bringing the passive of the bank to a value equal to its active; once the deficit is cleared that way, another part of the creditors’ claims is converted (respecting the hierarchy again), causing them to become shareholders to the extent necessary to restore the assets of 10, which is necessary for the bank to work. If the bank has only insufficient assets, but no deficit, the shareholders are diluted, but not eliminated”.
What changes, then, with respect to the previous situation? The biggest difference is that public intervention is no longer necessary, except certain cases when the procedure of “Resolution”, if the institute is systemically important, the possibility to draw from internal resources were exhausted and current account holders and creditors were protected in accordance with the principle of no creditor worse off, i.e. that no creditor can suffer a loss greater than the failure of the bank and its subsequent clearance.
In the case of bail in, thus, resources needed for the reorganization would be first drawn from the bank’s risk capital, clearing the value of the shares, then from the creditors, according to their degree of credit risk (starting from the subordinate bonds and gradually reaching, in the most serious cases, the accounts whose settlements exceed 100’000 €), protecting the savers.
What does this protection mean, then, considering that it involves the contribution of the account holders to the reorganization of the bank? The accounts, up to the guarantee threshold of 100 000 euros, are excluded from the process of recapitalization of the bank, but also the accounts with exceeding settlements represent the extrema ratio of the rescuing operation. Hence, they will not be affected if shareholders and bondholders are sufficient to cancel the debts.
Other financial tools in storage are thus excluded from the procedure, actions which belong to third parties, obligations of the third parties and investment funds in the portfolio cannot be touched.
The introduction of this tool is an important step in the redefinition of the banking environment because, whereas on the one hand, the”safety” – perceived rather than real –, of an investment decreases, on the other hand, it strengthens the responsibility both of the banking management, which will no longer be able to venture into investments nor open risky credits, not being able to count on the possibility to use public funds anymore to guarantee the solvency of the banks, and that of the savers themselves who will be constrained to make more aware choices to manage their savings.
What will develop now is a true financial culture, also a basic one, because we will no longer be able to think that “banks are all the same”, citing one of the most recurrent expressions pronounced in bars, but that there are solid banks and banks which are more at risk… and not always the Bank around the corner is the most suitable one to satisfy your needs.
The following focal point is characterized, thus, by greater attention every investor has to ask for when they invest their assets: no longer classic “savings account” nor purchasing products from a single issuer (as many not particularly professional ‘consultants’ suggest, wrongly thinking, that they are acting for the good of the company they work for) but the creation of a real differentiation of portfolios, between the funds and bonds of the different issuers, perhaps even using the tool of the accumulation plane which allows one to invest with frequent little quotas in cases when the initial capital is little.
I have not talked about actions exactly because they represent the riskiest tool, the most volatile one, since it implies participation in the risky capital of the quoted companies and it would be better to leave them to experienced and professional investors unless one does not intend to follow with constancy stock portfolios. Certainly this article does not mean to be a guide for prospective investors, but maybe it can give some ideas for a better study of this topic and not be unprepared for the future which, as we can see, will never be “risk-free” again, as it used to be in the past.