ECB's Knot backs banks providing transparency before depositor bail-ins

Reuters reports that the ECB's Klaus Knot supports the EU template that includes having uninsured depositors helping to bail-in undercapitalized banks.  However, he wants the banks to provide transparency before any uninsured depositor bail-ins.

A point that your humble blogger first presented!

Mr. Knot recognizes that the problem is not that uninsured depositors are a source of funds for recapitalizing the banks.  The problem is that in the absence of transparency there is both a perception and reality that the deposits are being "seized".

What further exacerbates this perception and reality of deposit seizure is the governments have made an investment representation about the banks through the announcement of the results of the stress tests.

By announcing that the banks passed a solvency-focused stress test or need a modest amount of additional capital, the government creates a moral obligation to protect depositors who could reasonably rely on these results when making a decision to keep funds at a bank.

Regular readers know that the government announcing the results of a stress test would not be a problem if the banks were required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

Under the FDR Framework, which is the basis for the global financial system, investors are responsible under the principle of caveat emptor (buyer beware) for all losses on their investment exposures.  This gives investors the incentive to not rely on the government's representation, but to independently assess the disclosed information and make an investment decision based on the results of their own assessment.

Your humble blogger supports Mr. Knot and would ask that the EU policymakers declare a moratorium on deposit bail-ins until a) the banks provide ultra transparency and b) depositors and other investors have had 6 months of access to this information to assess the risk and solvency of the banks.  After the 6 months has ended, all new uninsured deposits along with unsecured debt and equity is subject to being used to bail-in and recapitalize the banks.

European Central Bank Governing Council member Klaas Knot said on Friday there was "little wrong" with Eurogroup chair Jeroen Dijsselbloem's recipe for dealing with future euro zone banking crises, a newspaper reported. 

Dijsselbloem, the head of the euro zone's finance ministers and like Knot a Dutchman, said on Monday the rescue program agreed for Cyprus - the first to impose a levy on bank deposits - would serve as a model for future crises.....

But Knot, who sits on the bank's main decision-making body, said: "There is little wrong with Dijsselbloem's remarks. 

"The content of his remarks comes down to an approach which has been on the table for a longer time in Europe. This approach will be part of the European liquidation policy."...

"Firstly, there has to be transparency about losses in the banking sector. Secondly, banks have to wind down their loss-making operations," Knot said.