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Draghi’s Depositor Preference Call Risks Stoking Borrowing Costs

April 05, 2013

European Central Bank President Mario Draghi’s call to make deposits safer than bank bonds risks pushing up lenders’ borrowing costs.

Draghi yesterday pointed out the “explicit distinction” in the U.S. between uninsured depositors, who tend not to suffer losses in a banking collapse, and bondholders. Speaking at the ECB’s monthly press conference in Frankfurt, he said “the same distinction should be present” in new rules on bank bailouts being drawn up by the European Commission.

European policy makers are debating legislation on how bank failures should be handled, including inflicting losses on creditors. Bondholders are now in the firing line after Cyprus’s failed attempt to raid bank accounts below 100,000 euros ($130,000) to help fund its bailout caused a backlash.

The agenda of regulators “could soon be all about making sure that banks have a capital structure that would allow them to save all the depositors,” said John Raymond, an analyst at CreditSights Inc. in London. “This is a big deal for senior bondholders.”

So-called depositor preference is important for bondholders because of the impact on recovery rates after a collapse, according to Raymond. If the authorities exclude a given group from taking losses, remaining creditors have to lose more.

“After Cyprus, it’s becoming increasingly evident that bondholders are less senior than depositors,” said Robert Kendrick, a London-based analyst at Legal & General Investment Management, which oversees about $585 billion. “Clarifying that and making it explicit might not actually be a bad thing because then we’d know for certain we’re less senior and could charge a bit more to lend.”

Bondholders are more important in funding European banks than those in the U.S. The median loan-to-deposit ratio for Europe’s 22 biggest banks is 118.6 percent, compared with 69.6 percent for the U.S., according to CreditSights.

Senior debt investors are formally on the same level as depositors in Europe.

To contact the reporter on this story: John Glover in London at

To contact the editor responsible for this story: Paul Armstrong at

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