Two Italian Zombie Banks Toppled Friday Night

ECB shuts down Veneto Banca and Banca Popolare di Vicenza.

When banks fail and regulators decide to liquidate them, it happens on Friday evening so that there is a weekend to clean up the mess. And this is what happened in Italy – with two banks!

It’s over for the two banks that have been prominent zombies in the Italian banking crisis: Veneto Banca and Banca Popolare di Vicenza, in northeastern Italy.

The banks have combined assets of €60 billion, a good part of which are toxic and no one wanted to touch them. They already received a bailout but more would have been required, and given the uncertainty and the messiness of their books, nothing was forthcoming, and the ECB which regulates them lost its patience.

In a tersely worded statement, the ECB’s office of Banking Supervision ordered the banks to be wound up because they “were failing or likely to fail as the two banks repeatedly breached supervisory capital requirements.”

“Failing or likely to fail” is the key phrase that banking supervisors use for banks that “should be put in resolution or wound up under normal insolvency proceedings,” the statement said. This is the first Italian bank liquidation under Europe’s new Single Resolution Mechanism Regulation. The ECB explained:

The ECB had given the banks time to present capital plans, but the banks had been unable to offer credible solutions going forward.

Consequently, the ECB deemed that both banks were failing or likely to fail and duly informed the Single Resolution Board (SRB), which concluded that the conditions for a resolution action in relation to the two banks had not been met. The banks will be wound up under Italian insolvency procedures.

And the ECB provides a little history of its failed efforts to put these banks on the right track:

ECB Banking Supervision has closely monitored the two banks since capital shortfalls were identified by the comprehensive assessment in 2014. Since then, the two banks have struggled to overcome high levels of non-performing loans and underlying challenges to their business models, which resulted in further deterioration of their financial position.

In 2016, the Atlante fund [Italy’s government-sponsored “bad bank” set up in Luxembourg to take toxic assets off Italian banks books] invested approximately €3.5 billion in Veneto Banca and Banca Popolare di Vicenza. However, the financial position of the two banks deteriorated further in 2017.

The ECB had therefore asked the banks to provide a capital plan to ensure compliance with capital requirements. Both banks presented business plans which were deemed not to be credible by the ECB.

So nothing worked. Private sector money stayed away in droves. JP Morgan, which had been recruited to save the Italian banks, threw in the towel. These banks had been zombies for too long. Everybody knew it. But the government kept denying it.

Just weeks ago, Italy’s Minister of Economy Pier Carlo Padoan insisted that the two banks would not be wound down. Last year, to dispel the mountain of evidence to the contrary, he insisted that that there would be no need of any future bail outs; and that, furthermore, Italy did not even have a banking problem.

In early June, the two banks were instructed by the European Commission to raise an additional €1.25 billion in private capital. No one bit. Italy’s government then tried to persuade the European Commission and the ECB to water down the requirement to €600-800 million, and it urged Italian banks to chip in to the bank rescue fund.

All that failed. So this weekend, the Italian government gets to sit down together for a friendly chat to enact the necessary measures to protect depositors and senior bondholders in those two banks. Stockholders will be crushed. Junior bondholders will likely get slammed hard. And the Italian taxpayer might face some additional pain – all of it caused by many years of terrible and reckless bank management. The saga of the long-festering banking crisis has thus moved on to the next chapter.

A new era has begun in Europe. And it started in Spain. Many Banco Popular investors were wiped out. Taxpayers are off the hook. Read…  “Bail-In” Era for Europe’s Banking Crisis Begins

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  75 comments for “Two Italian Zombie Banks Toppled Friday Night

  1. raxadian says:

    Honesty it just a matter of time that a movement to “Let them fall!” spreads all over the Euro zone by people who is tired of paying the cost of giving money to banks who don’t have it. Wouldn’t it have been cheaper if those banks had just been given a single year to try to recover? Why it took three to finally shut them down?

    • nick kelly says:

      So one last week, two this week, just 480 to go.

      Seriously, is this not a systemic threat not just to the banking system but to the Italian State? Is not a war measures type of emergency action required?

      Italy did crack down on the mafia, with huge trials etc.
      No doubt they are still around and still infecting the banks.

      All the more reason to have no- holds- barred government swoop on the whole festering mess. Nationalize the whole lot and fire the top thousand fat cats.

      At a salary at a minimum of a hundred thousand per cat, you’ve got a nice savings to offer the ECB (read: Germany) when you plead for the required backing to clean these stables.

      This strategy is not an ideal solution, any more than amputation is the ideal solution for a diseased limb. But it may be the only practical solution to a gangrenous banking system that threatens the stability of Italy, and by extension the whole euro zone and the EU project.

      Spain, as DQ has informed me, is not in same predicament with far fewer banks and Santander as a relatively sound anchor.

      Greece and Portugal are manageable by the ECB and IMF.

      Italy is too big to bail out and should be stabilized BEFORE a run on ALL its banks begins.

  2. John says:

    Where is the accountability with the government? It seems to me that Mr. Padoan or the Italian government he worked for should be responsible to any investors or depositors who didn’t get their money out of those banks in time. After all, he was in a position of power and influence and told the people that there was no problem. He or who he worked for should be sued right down to his underwear.

    • chip javert says:

      Yea, right. Everybody knew this was a political game, and nobody wanted to come up with any new cash. God forbid – nobody was going to, you know, actually repay a loan.


      Next (and there will be a next).

    • MC says:

      Depositors are not going to lose a dime, trust me on this. The biggest inconvenience is they’ll have to deal with Intesa-San Paolo’s blood pressure rising home banking software.
      Same about performing loans: they’ll be merely transferred to Intesa at the present conditions. Nothing will change for people who have kept their credit score.

      Who is going to get slaughtered are the shareholders and non-secured/junior bondholders. After the Banco Popular and Bremen bail-in’s these bondholders, once considered almost as untouchable as senior ones, are fair game and they know it. And it was about time.

      Now the big problem are the €40 billion in assets Intesa doesn’t want. What to do with them?

      • 38BWD22 says:

        We are on vacation in Turin (NW Italy). I pulled 250 euro from an Intesa-San Paola bank ATM just three hours ago (funds from my US bank account). No problem.

        I’ll see if I can pick up an Italian newspaper (esp. their business one) to see what they may report.

        Great website, Wolf!

      • Maximus Minimus says:

        Does Intesa use the same software throughout it’s banking conglomerate, i.e. it’s EU acquisitions?

    • Maximus Minimus says:

      Investing is for people with brains; you should know what political double speak to the press is. If you do not have brains, you can always invest in real estate, and the central banks will cover your behind.

  3. BoyfromTottenham says:

    Hi from Oz. “Stockholders will be crushed. Junior bondholders will likely get slammed hard. And the Italian taxpayer might face some additional pain…”.
    And senior bondholders get made whole? OK, scale this up to level of the 2008/9 bailouts….

    • Wolf Richter says:

      Senior bondholders in banks are sacred. We learned that during the financial crisis. Buffett said at the time that the government should just give senior bondholders in banks a blanket guarantee… he whose portfolio was full of senior bank bonds.

      • Niko says:

        Why are people so enthralled with Buffett? He continues to make money on the plight of others but acts like he is “Robin Hood”

        • Wolf Richter says:

          Somebody ought to write a dissertation on your question. But most likely, the topic would be quashed.

        • d says:

          All you have to do is look at the stock price.

          If you Borrowed 100K in 1990 and brought Berkshire today you would have 3 Mill. (App)

          Nobody else has that sort of return.

        • OtoyaYamaguchi says:

          Warren has “Mommy” issues. Most important thing in the world to Warren is, (his words), “to be loved”. Notice how he only gives interviews to hot females? Always pushing Socialistic cures for thee but not for he?

        • d says:

          “Notice how he only gives interviews to hot females?”

          If you are around 80 years old and must allow yourself to be interrogated by somebody whose entity is going to make money from the exercise. You may as well have something decent to look at with reasonable manners, during the experience.

          “Always pushing Socialistic cures for thee but not for he?”

          This statement is garbage.

          Buffet continually states the system should be taking more taxes from him.

          If you are going to bash warren as he is successful and you can, or have issues with him, at least base you attack’s in FACTS.

  4. SimplyPut7 says:


    It seems like central banks around the world are tired of QE and low interest rate policies that didn’t help the poor and middle class. And are protecting depositors, while trying to get rid of fake equity, assets and zombie companies.

    This seems to good to be true.

  5. Maximus Minimus says:

    As I read it, this different from the way FDIC wound down more than hundred banks after 2007. Those banks were sold to competitors (equity wiped out), but depositors remained whole. Since these will be liquidated, what happens to deposits? Will they pay the insured amount of up to €100,000? There is a theoretically a potential for panic. Theoretical because any smart depositor would have moved their money out.

    • Wolf Richter says:

      Deposits will be protected along with with senior bonds, as I pointed out in the article. The bank’s assets will be sold to competitors – that’s what “liquidate” means.. sell the pieces to whoever wants them. So this is very similar to an FDIC bank resolution. In the US it’s routine. In southern Europe, it’s new.

      • JR says:

        There is less here to this story than meets the eye. (1) The ECB punted to the SRB, which punted to “normal Italian insolvency proceedings”, lol. (2) Although clearly these two are not TBTF, but they will still be loaded with the alleged forced bond sales and forced stock purchases that accompany loans (see the story about Mr. Rossi in the NYT). Therefore they are too politically connected to quickly resolve. Finally foreclosure is famously slower than (insert favorite analogy) – this from Blackrock: “Lengthy foreclosure procedures in Italy are a key burden in the NPL work-out process. It takes an average of seven to eight years for a dispute to make its way through the courts. This means banks have to wait longer to cash in on collateral and consequently take larger marks on bad loans than otherwise required.” I suspect that on Monday there will be some movement to start working on this by the authorities after they meet in 2018.

      • d says:

        “In southern Europe, it’s new.”

        And decades overdue.

      • Maximus Minimus says:

        And so the NPLs will be resolved in court over the next decades?

      • Maximus Minimus says:

        But…Italians do not create opaque, toxic banking “products”. That is the prerogative of the US banking industry.

    • MC says:

      Here what is going to happen.
      The Italian government was originally approached by BNP-Paribas, a giant French bank largely owned by the State, for a takeover of both Veneto Banca and Banca Popolare di Vicenza.
      BNP offered €1 for each bank and asked for “toxic assets” (estimated at the time at €12 billion) to be wiped from the books. The Italian government balked because of the thousands of job cuts BNP had planned and the deal fell through: Italian bank workers are not only extremely well paid, but they tend to be political hires.

      The only plan the Italian government now has is that presented on Wednesday by Intesa-San Paolo.
      Intesa holds the knife by the handle and knows it: they offered €1 for both banks and out of the €60 billion in assets they want to keep just €20 billion. The rest is just toxic financial waste the government will have to eat up.
      Among these €20 billion are bank deposits: don’t worry, those deposits aren’t going to waste. Not a single penny will be lost: it only remains to be see if the bank accounts will be merely transferred to Intesa or if the two banks will become Intesa “local brands”.
      Intesa also wants a free hand in restructuring the two banks, meaning no government interference while they shut down branches and fire people.
      Again the government is balking at the potential loss of thousands of political clients in a very restricted area but, honestly, there are no alternatives.

      In short: depositors have nothing to fear. They won’t lose a single penny. The only thing they risk a dramatic spike in blood pressure when having to deal with Intesa’s atrocious home banking software.

      • Stevedcfc72 says:

        Good Summary MC. Intesa as you say will do what BNP would have done and close 1,000 branches. The interesting one is that they want the Italian government to pay all the redundancies caused by that. That could be 11,000 people, not a small sum.

        As you say Intesa hold the cards on this. The region these banks are mainly situated in is the second biggest by value of exported goods from Italy.

        • Dan Romig says:

          My Wilier Triestina with Campagnolo Super Record 11 is a product of Vicenza, and it is as good as it gets for a road bike. But, I have Minnesota made Hed Ardennes wheels on her.

          It’s about time that failing banks get liquidated! In my view, this should have happened in the US at the end of 2008.

      • cdr says:

        In a strange way, this sounds almost responsible. The $40 billion is pocket change and can be easily laundered over time into ECB financed debt and possibly even be sold into tranches for pension fund investment after a reasonable period of time so people can forget where it came from. Being a borrower at an Italian bank is like winning the lottery.

    • JMiller says:

      Maximus Minimus,

      Not all depositors remained whole. For example when IndyMac failed back in 2008, depositors only got back 50 cents for every dollar of uninsured deposits. About 8,800 IndyMac depositors lost a total of nearly $266 million. A number of other banks also failed back in 2008 in which depositors lost some and may be all of their uninsured deposits. Some of the banks were Hume Bank of Hume, Missouri; ANB Financial of Bentonville, Arkansas; First Priority Bank of Bradenton, Florida; Columbian Bank and Trust of Topeka, Kansas; and Silver State Bank of Henderson, Nevada.

  6. unit472 says:

    Maybe not an exact comparison but with the United States a bit more than 5 times the population of Italy and more than that GDP wise, closing two banks with €60 billion in assets would be on the scale of two US super regional banks being shut. Say Suntrust and PNC! Think there would be hell to pay on the markets Monday morning?

    • chip javert says:

      Italian banks, relative to USA banks, have a couple of differentiating characteristics:

      o Corrupt bank managers
      o Loan recipients who will not/cannot repay debt
      o Corrupt national government
      o MIA national regulators
      o Confused EU regulators
      o Taxpayers who tolerate all the above

      • David says:

        Cannot see any differentiation from USA in that list.

        • chip javert says:

          Well, if you insist on being argumentative, I suppose we could call it a matter of degree. However:

          1) US banks are much more aggressive in collecting loans and not allowed to carry zombie companies

          2) US banks get “resolved” (aka shut down & sold) very quickly relative to EU banks – once you hit about 10% NPL you’re gone

          3) US bank capital and bank-fundef FDIC (and similar funds) absorb most (not all) US bank losses; US banks are better capitalized and regulatory action is much quicker than in the EU

          4) US bank bank stress tests are materially more rigorous than EU tests

          5) Relative to GDP, US taxpayers do not eat as much bank garbage as in EU

          Given the above and the stunning amounts (relative to GDP – think Greece) EU taxpayers have & will continue to spend cleaning banks, there is quite a difference.

          I will grant you that Wells Fargo’s recent fraudulent customer activity has yet to land a single banker in jail, and that’s just wrong.

        • JMiller says:


          You are correct. There certainly are differences between the U.S. banks and the European banks. In general, U.S. banks are clearly in better shape than the European banks. The average Texas ratio for U.S. banks is about 10% while the average Texas ratio for European banks is around 50%.

      • marty says:

        I’m not getting it. What’s the diff between Italian and us banks? Looks the same to me…

        • cdr says:

          we don’t have negative rates (yet). Had Hillary won, they would be on the way. Somebody has to pay for the free stuff for everyone who doesn’t save money.

    • MC says:

      Intesa-San Paolo’s offer to the Italian government speaks clearly: they are going to keep €20 billion in productive assets ( chiefly deposits and performing loans) and dump €40 billion in “toxic assets”.

      Those €40 billion, together with the thousands of jobs Intesa needs to cut from the two failed banks (mostly political hires earning extremely generous salaries by Italian standards), will be the crux of the negotiations.

      Until an agreement between Intesa and the Italian State is reached on the matter, expect this fiasco to have relatively little effect on markets. Shares of the two banks may actually rebound as, to quote Mr Richter, “dip buyers try picking pennies in front of the steamroller”.
      Peripheral Euro bank stocks have been hit on the head since the Banco Popular bail-in. All gains the ECB so laboriously engineered in 2016 have evaporated in little over a month.

      With yet another round of TLTRO in full swing I wouldn’t be too surprised if share buybacks became more frantic and common just to stem this rout at the margins. But I am not going to bet on that.

  7. mean chicken says:

    Best way to rob a bank is from the inside.

    • walter map says:

      Those parasites, they just get into everything.

      The only treatment is to kill the host, because the disease itself has political protection.

  8. walter map says:

    2017’s Elevated Bank Failure Figure Is Not A Cause For Concern

    “Data compiled by the FDIC about U.S. bank failures shows a rather discomforting trend: 5 U.S. commercial banks have failed so far in 2017 …”

    Nothing to see here, folks. Move along.

    • Petunia says:

      The First NBC Bank failure in New Orleans is turning into a juicy scandal, rivaling anything the Italians and Spanish could come up with. There are already law suits being filed all over the place connected to the failure. The bank is particularly interesting because its asset were mostly tax credits, a derivative which would have been really popular, if “you know who” had won.

      • walter map says:

        Even the juiciest bankster scandal leaves me flat, Petunia. It’s all crime and no punishment. No wonder all the crooks go in for it. But where’s the bloody drama, I ask you?

        Call me avant-garde, but I think crimes should be punished, and not rewarded. Can’t we have a few executions just to spice things up a bit?

        • cjip javert says:

          Strongly agree, and I submit the Wells Fargo board of directors as exhibit #1.

          I’m a long-time Berkshire Hathaway investor, and I generally admire Warren Buffet. However, even though BRK owns about 10% of WFB, Buffet has been MIA regarding board accountability & cleaning up the bank. Very disappointing.

    • Net says:

      Ok super politician. People say the darndest things while they hope their pay check keeps coming.

    • JMiller says:

      The few bank failures so far in 2017 is not that big of a deal. 6 bank failures out of almost 6,000 banks is not a cause for concern.

  9. Kf6vci says:

    Apparently, there is NO standard process in place regarding the “bail in” mechanism.

    The Italian minister should be sued. Spewing falsehood…

    • walter map says:

      “Lying” is now called “free speech,” and for the privileged is not a crime. Try to keep up.

  10. Stevedcfc72 says:

    Inevitable these two Veneto Banks were finished. Their last set of accounts were terrible.

    Its not so much the fact that two smaller banks have failed its the fact that what’s happened at these banks is happening-has happened at other Italian Banks on a bigger scale.

    It will be interesting to see what happens Monday with Monte De Paschi Bank a lot bigger bank which are just as bankrupt.

  11. Hkan says:

    Once this bank mess been cleaned up in Italy, Spain and rest of southern EU the remaining larger fewer banks will crash sooner or later.

    The southern European mentality been around for centurys will survive causing never ending trouble. No system no rules no politician no one can make that disappear.

    To understand this basic knowledge is essential. EU is never gonno work!!

  12. Mike R. says:

    Why do we think the bondholders won’t be made whole? The ECB could simply buy up this paper with it’s QE program, couldn’t it?

    Of course it could/would be done along convoluted/complex lines as to conceal the move.

    The last thing the ECB wants is to start a run on bad bank bonds, as people will get the impression that they are starting to clean up these banks. My guess is the word has been quietly put out to th big players that they will be made whole. Just a guess.

    • Stevedcfc72 says:

      Agree Mike with Santander in Spain and Intesa in Italy the word has definitely gone out they are covered 100%. What a great position to be in and make an easy buck off another banks demise.

      Unicredit will probably take on Monte De P (Well its good bits anyway).

  13. cdr says:

    But, how does it end and how does the entire event, from closure to sale and loss recognition extrapolate over the entire Italian banking system?

    The entire pattern of the Eurozone and European Union is ‘kick the can’, not operating responsibly. Never spend real money if a fake solution can be made to look like a real solution and put troubles off for a little longer. Print money and force interest rates as low as possible are the favorite tools so far. Paint over everything whenever possible. Their predictability is almost comically certain.

    Since loss recognition was not described above, I can only assume that part isn’t known yet.

    A Eurozone that starts acting financially responsible will create massive uncertainty, to borrow a phrase. An Italian bank shutdown plan that offers predictability and does not include a kick the can component could actually give them a little credibility. Yes, that sounds preposterous, but how this ends and how it extrapolates over the entire banking system will be revealing.

    Of course, shutting down a bank, responsibly or not, has little to do with normalizing interest rates for an economy that would cease to exist if rates were normalized. But responsible behavior with bad banks in Italy would give the ECB a couple of years more time with low rates before the farce looks old.

  14. David says:

    The idea behind the liquidation is clear. Regulators hope to prevent bank runs at the larger banks by depositors and protect senior (hedge fund) bondholders. Banco Popular and the two Italian Banks were important on a regional basis but were not systemically important.
    They were mom and pop banks. They took in deposits and lent them out but they didn’t make a market in derivatives and didn’t insure cross border counter party risk. The system can survive as long as the major banks involved in the derivatives market can stay afloat. The problem is that they are as bankrupt as these three banks.
    These events seem to move along a well defined path. First it is the regional banks. Then it becomes a medium size bank with an unknown large counter party risk to a national bank. Then the viability of the national bank is put at risk.
    The rot is already there. It just hasn’t been exposed yet. Bad loans abound in the European Banking system. We are in the third inning of a very long game or at half time of a soccer game headed to overtime, if you prefer a European analogy.
    What you should be looking for is a major mid tier bank that is involved in derivative trading or international trade counter party risk to get in financial trouble. That is when the game will get interesting.
    Forget the crumbs falling from the table. The regulators can sweep those under the rug.

    • cdr says:

      Thanks for differentiating the banks and the associated risk. I can appreciate the macro picture but need articles like this and explanations like yours to bring out the details.

  15. fjd says:

    Intesa is offering one Euro for a completely cleaned-up and re-capitalized entity. Period. Full Stop. The cost to Italian taxpayers will be significant.

    Please see link below.

  16. RangerOne says:

    Sounds like what should be happening. Still if too many banks fall this way perhaps the end result is the same or potentially equally as bad.

    • d says:


      The end result is good

      Much Toxic debt that needs to be written off will be in the process and many small banksy that were once trading houses in Club-Med which were never profitable as stand alone banks will be gone.

      Club-Med has to many banks WAY TO MANY.

      Their Operators have a choice, Cooperative Consolidation, or Consolidation Via Bankruptcy.

      The Euro Banking system can not heal or move forward with the Thousands of Zombie Bank’s in Club-Med left in the system. Simple.

  17. DCR says:

    $40B in toxic assets, and how much in “equity” (long gone in any realistic sense) and junior bonds? What’s another $10-20B in new Italian government debt among corrupt politicians and crony central bankers?

  18. Realist says:

    Maybe worth to check out some ancient history, ie what Roman emperor Aurelian did to rein in the runaway mint of Rome. It wasn’t too pleasant for the ‘central banker’ of the day ;)

  19. IdahoPotato says:

    The ECB is willing to shut down small failing banks to prevent contagion into the entire sector, but it has no qualms loading up on “non-rated” bonds from zombie companies.

    They can’t buy junk bonds, but they can buy “non-rated” bonds, apparently.

  20. Wilbur58 says:

    Can someone help me, please? Why on earth are bond-holders protected? The only people who should get protections are innocent depositors. I can live with the people bailing them out.

    I know that the obvious answer is “corruption” and the “rich always win”. But can someone give me at least a decent justification for why anyone should give a flying F about bondholders, senior or otherwise?

    And please spare me any BS about retirement funds.

    Wolf, the coverage at your site about the European banks is frickin’ outstanding!!! Thank you.

    • Wilbur58 says:

      Sorry for the double post, but I guess I want to ask the question another way:

      We’d all agree that if a bank lender engages in unscrupulous loans, and those loans don’t pay back, the bank lender must suffer the loss.

      So why should the people bail out the lenders to the unscrupulous bank lenders, the bondholders? That’s absurd.

      That’s like making the kingpin immune from the actions of his hitman.

      • Wolf Richter says:


        Senior bonds are near the top of the capital structure, so a lot of lower-ranked debts would be wiped out first. If regulators don’t wait forever before they shut down a bank, bailing in shareholders and junior bondholders is usually more than enough to cover the equity hole, and there is no need to bail in senior bonds. But once the banks are in really bad shape, such as those two Italian zombies, or they don’t have enough junior bonds outstanding, the losses creep up the capital structure and eventually hit senior bonds.

        Among the often cited reasons for protecting senior bonds of banks:

        – These bonds are a source of predictable, non-volatile funding for the banks: there cannot be a “run on bonds” at a teetering banks, but there can be a “run on deposits.” So a 10-year note comes due in 10 years, and the bank can rely on having this money for those 10 years. By contrast, deposits can evaporate at any moment, potentially toppling the bank.

        – Since these bonds are secured and considered low risk, they’re low cost funding for the bank. If the market perceives them as riskier, investors will demand higher yields (in normal times, not now maybe) and the cost of funding will go up for banks. Higher cost of funding for banks means higher rates on loans they extend, in theory. If the shift is sudden, when for example some bank failures drive up yields of senior bonds, this could slow down lending.

        While these reasons may be true, I don’t think they’re reason enough for taxpayers or central banks to bail out holders of senior bonds. I think bond holders should experience the consequences of the risks they took.

        • Wilbur58 says:

          Hi Wolf,

          Thank you for your thoughtful response. It looks like we agree on bond holders. Here are my respnoses not to you, but to the two reasons given for protecting the senior bond holders:

          1) A bank can have stability by acting like an actual bank. Lend appropriately and in proportion to real assets on hand.

          2) Yay! Interest rates go up and assets crash. Savers are rewarded with more savings interest. Less private debt in the world. Sounds great.

          I think I safely belong to the camp who believe that money creation simply should not be in the hands of banks.

          I’m still confused about what a bail in is? Can you please provide a simple explanation? Does that mean that shareholders have to actually pay money to the bank as part of keeping their shares?


        • Wolf Richter says:

          Bail in = bank investors bear the consequences of their decisions and lose money. So a bondholder “bail in” is when bondholders lose some or all their investment.

          Bail-out = investors are made whole by the taxpayer or a central bank. It’s when taxpayers and/or the public take the losses that should have accrued to investors who were already compensated for taking those risk (via the yield of their investments in prior years).

        • chip javert says:


          Managing the class of senior bondholders is an interesting problem, but I do share your feeling about them taking haircuts in bank failures. The question is “to what degree?”. Lots of ways to skin this cat: e.g. require senior bondholders to also own some portion of junior bonds.

          There needs to be credible incentives for them to communicate displeasure & concern to bank managements. Currently, EU bank senior bonds must be underpriced (relative to risk) if regulators hold them harmless.

      • chip javert says:


        You call senior bondholders “unscrupulous bank lenders” – unless the bondholders are the same people as the corrupt bank managers or regulators, they have absolutely no role or culpability in the lending process.

        1) When a loan begins to go bad, bank managers have a responsibility to encourage repayment and/or to set aside loan loss reserves proportional to the risk of loss

        2) Regulators are responsible for reviewing loan quality and loan loss calculations to ensure they somewhat reflect reality

        Senior bondholders are not involved or responsible for either of these processes. Under the circumstances, it’s difficult to understand your animosity as anything other than naiveté .

        For the record (as I’ve said elsewhere responding to you) senior bondholders deserve some, but not total protection. They are highly important but not sacred.

        • d says:

          Some people are demented, they believe that Banks, the FED and all people who invest in them, are an evil cabal, set on dominating the world against the small people.

          Trying to educate them, or convince them otherwise, is not possible.

          Just Like beating your head against a brick wall, it feels good WHEN YOU STOP.

    • chip javert says:


      1) Banks are required for a modern economy (if you don’t accept this, it’s useless to read further)

      2) BY DESIGN all banks are inherently unstable because they use short-term customer deposits to fund much longer-term loans (if you do not understand this, it’s useless to read further)

      3) Senior bond holders commit material amounts of long-term capital (generally in the range of 5-30 years) to banks to help bridge the short/long-term gap

      4) If senior bondholders were frequently and substantially abused, substantially fewer of them would fulfill this critical role. or it would be done at a much higher cost.

      5) Senior bondholders should be respected, but they are not sacred. In extreme circumstances, they should at least take a haircut (small to moderate loss).

      Almost universally, regulatory forbearance (regulators failing to do their job in a timely manner) DRAMATICALLY accelerates & deepens losses. Senior bond debt is hardly ever large enough to cover these losses, and the only option left is depositor and/or taxpayer losses.

      Agreed: protecting senior bondholders benefits rich guys. If at least some of this didn’t happen, it would be much harder to have a bank.

      Does that help?

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