The “resolution” of Cyprus’ banks is a bad joke. Resolution is one of the new buzzwords in financial regulation. The practice is supposed to stop taxpayers having to bail out banks, while imposing pain fairly on shareholders and creditors.
In Cyprus, Greek deposits and favoured groups at home are exempt from haircuts, while other groups of depositor are hammered even harder. It’s anything but fair.
The resolution of Cyprus’ banks doesn’t matter just for those directly affected. It is one of the most ambitious cases of cross-border resolution since the financial crisis began. So a bad result here is hardly a good advertisement for the technique.
The Financial Stability Board (FSB), which coordinates financial regulation on an international level, published a document in 2011 setting out how resolution should work. Important principles are that the hierarchy of claims should be respected and that creditors of the same class should be treated equally.
The basic idea is that shareholders should take the first hit. Only after they are wiped out should the next line of defence, junior debt-holders, come into the line of fire. Only if they too are destroyed should the senior creditors, such as other bondholders and uninsured deposits, get haircuts. Insured deposits should be protected.