Europe's shiny new bank bail-in regime looks like the perfect tool for previous banking crises. The agreement reached this week by European leaders would force shareholders and creditors to swallow losses of 8 percent of their bank's liabilities in a future banking crash. That would have spared euro zone taxpayers from pumping in their own resources to protect most of their biggest banks in 2008. But it doesn't provide a guarantee that public money will never be used to rescue banks in the future.
The repeated bailouts of Royal Bank of Scotland cost the UK taxpayer over 45 billion pounds. But under the new rules, the lender's mega balance sheet of 1.8 trillion pounds would have provided a huge chunk of bail-inable liabilities - only 2.5 percent of those would have been needed.
Perhaps surprisingly, the new rule might also have protected Spain from its most notorious bank bust, Bankia. Madrid pumped 22.4 billion euros of public funds into BFA, Bankia's holding company. That's just under 8 percent of its 287 billion euro balance sheet in 2011 - here again, that would have fallen within the new euro zone guidelines.
On the face of it, Anglo Irish Bank looks different. It only had liabilities and equity of 101 billion euros in 2008, but required 29.2 billion euros to avoid a blow-up. In the case of a bail-in, that would have represented 29 percent of the balance sheet - way above the 8 percent minimum.
Yet the new regime may, at a stretch, have helped here too. In unspecified "special" circumstances, the new system allows for a higher minimum bail-in of 20 percent of risk-weighted assets. Anglo's 86 billion euros of RWAs would have meant more than 17 billion euros of bail-in capacity. The new regime might also have allowed Anglo to bail-in 8 billion extra euros of remaining senior debt. This, plus resolution fund resources, might have kept taxpayer support to a minimum.
What's not clear is how well the new regime would manage an Anglo-style implosion in the future. After five years of crisis, banks don't necessarily have high levels of bail-inable debt because regulators prefer them to hold safer customer deposits. Noticing this, the new regime allows for national regulators to ensure banks have sufficient stocks of haircuttable securities. If they don't do this vigilantly, taxpayers will remain on the hook.
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