The hair cut on deposits implemented in the Cyprus case has sent world depositors into fibrillation: accounts above 100.000 euros will undergo a hair cut of up to 40%. Not only that According to UBS analysts it could also have implications on the capital structure of banks and on the costs of funding globally. This was revealed by a recent report by the Swiss bank which examines the consequences for banks of the Cyprus case. UBS analysts are thinking about two issues: they wonder if the management of the Cyprus case will lead to more bail-in debt issues and if the costs on deposits will increase since they are no longer considered risk-free. Not only. For UBS, the use of deposits to recapitalize banks will most likely add an element of pro-cyclicality to the system which will make future crises more difficult to resolve.
The risk of consequences on the capital structure and the cost of deposits is higher in Europe after the words of Jeroen Dijsselbloem, the Dutch finance minister at the head of the Eurogroup, who pointed to Cyprus as a model for solving future banking crises in the 'Eurozone. Because while it is true that this statement was quickly withdrawn or changed, large depositors in Europe will not fail to take note of these spontaneous comments. Similarly, UBS notes, small depositors will be aware of the initial proposal for a 6,75% haircut on their deposits, bypassing the deposit guarantee scheme through the use of fees instead of a direct cut. of accounts.
MORE BAIL IN DEBT?
For UBS, this could lead to more bail-in debt issuance. In fact, a potential reading of this situation with regard to the capital structure of banks calls into question the inclination of regulators (both at the level of Basile and of certain national regulators) in favor of a large amount of the so-called "contingent capital", i.e. that debt that is converted into equity in the event of a crisis or when certain events occur. This will likely increase demand from depositors themselves for large amounts of bail-in debt such as Coco bonds (hybrid bank bonds convertible into equity if capital strength ratios fall below a certain threshold). At the moment, in fact, only a few banks have resorted to these instruments (Barclays, Credit Suisse, Ubs, Lloyds and Rabobank). Also because the high cost of these bonds can act as a brake on the sector's profits. For example Barclays recently issued such a bond with a 7,25% coupon. In addition, some commentators have expressed doubts about the market's ability to absorb these instruments on a large scale.
Ubs explains: “Basel III allows banks to cover the gap between the Common equity tier 1 ratio and the Tier 1 ratio (bank strength indicators ed) with hybrid debt or bail in, and thus provides an incentive for management to issue this type of debt. We believe depositors, and especially large corporate depositors, may not demand a very high premium on deposits in those banks with high capital levels if provided through common equity or in combination with bail-in debt. And this will likely lead to greater variability in the rates paid to depositors.”
In contrast to the Cyprus bailout, the recapitalization of Bankia involved a significant dilution of existing equity capital by injecting new capital and at the same time converting existing hybrid and subordinated debt into equity. It should be noted that this bailout respected the capital structure and was specifically designed to protect depositors.
WILL THE COST OF DEPOSITS INCREASE?
Developments in Cyprus have raised concerns about the rising cost of deposits (since they are no longer considered risk-free). "We believe - notes UBS - that overall this risk is low and specific especially for the banks of Cyprus since these institutions have no other choice but to resort to depositors in the face of a very limited senior and subordinated debt compared to the assets". In any case, for UBS we are moving towards a scenario of greater variability in the pricing of deposits: banks whose balance sheets are undoubtedly likely to experience inflows in the wake of the "flight to quality" will probably be able to pay deposits less, while riskier banks will clearly have to pay a premium.
