New rules in Europe aiming to relieve the taxpayer from the burden of bailing out insolvent or weak banks came into force on January 1. The new “bail in” laws, formally known as the Bank Recovery and Resolution Directive (BRRD), requires creditors to incur losses of at least 8% of their total liabilities before receiving official sector aid.
In other words, shareholders, senior and junior bondholders and even depositors will wear losses before taxpayers are asked to provide support. The new rules do not apply to British banks, only eurozone ones. This has caused widespread nervousness about European banks. Greek bank share prices are now 99.97% below pre-GFC prices, the shares of Italian banks have been sold heavily and investors are now starting to absorb the impact of what the new rules mean for their investments.
Morally, the position of investors under the new rules is easy to justify. Why should taxpayers bail out banks that make bad loans or trading decisions? Investors need to be more discerning about which banks they will invest in, especially with regards to lending policies and risk standards.
The introduction of the new laws is now adding to fears about bank profitability, negative interest rates and the ineffectiveness of ultra-loose monetary policy around the globe. These fears are beginning to present as a possible systemic risk to the global banking system.