# If a bank is declared insolvent, who gets paid first?



## PaulHoughton (28 May 2009)

If a bank becomes insolvent, what is the order that creditors are repaid?

I presume that shareholders come last.

Do bondholders come ahead of retail depositors?

How about money borrowed from the ECB or interbank loans, where do they figure?


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## 26cb (28 May 2009)

The outgoing chief-executive and all of his board of directors :=)
Sorry....could not resist it !


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## Sunny (28 May 2009)

Generally speaking and forgetting about deposit and bond guarantee schemes, depositors and senior unsecured bond holders would be ranked pari passu. So would other banks who lent money to the defaulting bank on the interbank market. They would have to be paid before sub debt holders and shareholders. 

Thats my understanding but am open to correction


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## JQ2002 (28 May 2009)

If a bank goes bust, the Investors Compensation Scheme steps in to protect deposit holders, only to a maximum of 100k, the balance would rank as a creditor in the insolvency process.

Ordinary shareholders are afforded no protection.


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## PaulHoughton (29 May 2009)

OK, so senior bondholders and depositors are ranked equally. 

In the event of a bank insolvency, the depositors with demand accounts would want to withdraw their cash immediately. On the other hand, bondholders are normally only paid on coupon dates and maturity dates, so would they have any right to seek money from the bank before those dates?


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## Sunny (29 May 2009)

PaulHoughton said:


> OK, so senior bondholders and depositors are ranked equally.
> 
> In the event of a bank insolvency, the depositors with demand accounts would want to withdraw their cash immediately. On the other hand, bondholders are normally only paid on coupon dates and maturity dates, so would they have any right to seek money from the bank before those dates?


 
In the event of insolvency, depositors wouldn't usually be allowed to withdraw their money even if had a demand account. They would have to wait with all the other creditors for the assets to be sold off and see how much is left to satisfy the claims. This is all theoretical though.


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## z109 (31 May 2009)

PaulHoughton said:


> OK, so senior bondholders and depositors are ranked equally.
> 
> In the event of a bank insolvency, the depositors with demand accounts would want to withdraw their cash immediately. On the other hand, bondholders are normally only paid on coupon dates and maturity dates, so would they have any right to seek money from the bank before those dates?


That's senior unsecured bondholders. No bondholders per se. Anyone who has an asset secured loan gets those assets, I believe. So the 23.6 bn of assets that Anglo currently has repo'd at the ECB stay at the ECB.

This, IMO, is one of the reasons behind not closing Anglo down. Secured bond-holders would offload their security crashing asset prices.

It all begs the question, does Anglo have any real assets (other than goodwill, navel lint, and some old pennies from behind the sofa) with which it can pay its unsecured creditors? Just how insolvent is it?


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## PaulHoughton (2 Jun 2009)

Which asset prices are you referring to? property?


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## z109 (2 Jun 2009)

Whatever the assets are - in Anglo's case - 
- C&D (Construction and Development loans)
- Development land-banks
- Commercial Real Estate
The last one is the biggest portion of the Anglo loan book and the one with the most cross-over to the other banks, insurance companies, investment funds, pension funds. They are all loaded with it. That is the asset that is mostly being propped up, or at least that an attempt to slow the rate of fall is being made on.


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## PaulHoughton (4 Jun 2009)

Sorry for asking a dumb question but does Anglo own any of these assets directly: (land, property etc) or is it just owed money secured on these assets?


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## Sunny (4 Jun 2009)

PaulHoughton said:


> Sorry for asking a dumb question but does Anglo own any of these assets directly: (land, property etc) or is it just owed money secured on these assets?


 
It owns the loans secured by the assets and then if the loan defaults, Anglo will take direct ownership of the asset.


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## z109 (4 Jun 2009)

Anglo also has it's own property book - the buildings it owns for offices and branches, property investments (unspecified, apart from the writedowns on it's report) and presumably some stuff that it has already repossessed?

But, as Sunny says, most of it is stuff that is mortgaged to the bank or pledged as collateral.


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## PaulHoughton (4 Jun 2009)

OK, so are you saying that the reason anglo wasn't allowed to become insolvent was to avoid a flood of commercial property being put on the market that would lead to a reduction in values so large that other Irish banks might also become insolvent?

I think Lenihan said that multiple Irish bank insolvency would have left bond-holders out of pocket and would put them off buying Irish govt bonds in future. Is this the systemic risk that is mentioned? Or is it the cost of compensating retail depositors through the guarantee scheme?

I find it hard to imagine a situation worse than the one we're in. Am I wrong? Is there a worse situation that we have avoided?


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## z109 (4 Jun 2009)

PaulHoughton said:


> OK, so are you saying that the reason anglo wasn't allowed to become insolvent was to avoid a flood of commercial property being put on the market that would lead to a reduction in values so large that other Irish banks might also become insolvent?
> 
> I think Lenihan said that multiple Irish bank insolvency would have left bond-holders out of pocket and would put them off buying Irish govt bonds in future. Is this the systemic risk that is mentioned? Or is it the cost of compensating retail depositors through the guarantee scheme?
> 
> I find it hard to imagine a situation worse than the one we're in. Am I wrong? Is there a worse situation that we have avoided?


Yes, both are true.

I think the commercial property thing, though, is the more significant. There is nothing hard to value about commercial propery. The banks are not stuffed with assets that are difficult to price. They are stuffed with assets that they don't like the price of and don't want to recognise that price. An Anglo firesale would have recognised that price beyond doubt (it is not just the Irish banks that are in this position, the UK and US banks are stuffed with commercial property assets that they are holding at par, despite falls of 30-60% in commercial property indices). It would have meant immediate book losses on the banks (at year end, anyway) resulting in insolvency. The guarantee and keeping Anglo alive kicked the problem down the road.

The appearances are that foreign investors have fled Irish bonds anyway, preferring the massive issuance of their own governments, despite what the government has said. The NTMA has not published statistics on the purchasing ratio of Irish bonds since 2006. There has never been a breakdown, as far as I can see, between institutional and Central Bank purchases (unlike, for example, the Fed which produces regular reports on what sector is buying it's debt).

It is also disingenuous to confuse sovereign debt and corporate debt. They are rated under different systems. A AAA bank rating is not the same as a AAA country rating in not the same as a AAA structured finanace rating. All is says is best in class. So the idea that sovereign bond buyers would shun Irish bonds because an Irish corporation defaulted on it's bonds is at best disingenuous and probably just a lie. At the time of the guarantee, there was no government backing, implied or otherwise, for the banks. The guarantee at the time was, I believe, capped at €20k (?maybe that had changed earlier?). In fact, the guarantee and the likely costs of the Anglo nationalisation have decreased the attraction for Irish government debt, so saving Anglo has had the opposite effect to Mr. Lenihan's stated reason for saving it. Note, I use the word 'stated'.

A worse situation? Well, it depends on who you are. If you hold Anglo debt, you are laughing. You have gone from cents on the euro to being made whole. If you wrote insurance on those bonds, you are also money good. Who else? Um, the other banks, the developers who were in arrears who have not been liquidated, the golden circle, the Anglo Directors, (possibly anyone foolish enough to have over the deposit limit in Anglo?)... the list goes on...


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## PaulHoughton (4 Jun 2009)

I believe the guarantee scheme was 90% of deposit up to 20K, so that if you had 20K on deposit you would get 18K back. This was raised to 100K and then to infinity.

I don't understand why the national wealth of the country should be dissipated so fast to help a number of banks that are limited companies. The guarantee scheme provided an explicit contract between citizens and state in the event of a bank failure. The nature of a limited company provides an explicit contract between bond-holders and the state of what will happen to their bonds in the event of that company's demise. 

If all the local banks failed, would foreign banks not just buy the branch networks and re-open under new, more trustworthy flags: Santander, HSBC, Rabobank...?

At the same time, finance is not something I know much about so I have to hope that the state is doing the right thing and I just don't get it yet.


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## z109 (4 Jun 2009)

PaulHoughton said:


> I believe the guarantee scheme was 90% of deposit up to 20K, so that if you had 20K on deposit you would get 18K back. This was raised to 100K and then to infinity.


There's a bill before the Dail to bring it back down to 100k, but 100% of that amount.
http://www.finance.gov.ie/viewdoc.asp?DocID=5783



> I don't understand why the national wealth of the country should be dissipated so fast to help a number of banks that are limited companies. The guarantee scheme provided an explicit contract between citizens and state in the event of a bank failure. The nature of a limited company provides an explicit contract between bond-holders and the state of what will happen to their bonds in the event of that company's demise.
> 
> If all the local banks failed, would foreign banks not just buy the branch networks and re-open under new, more trustworthy flags: Santander, HSBC, Rabobank...?
> 
> At the same time, finance is not something I know much about so I have to hope that the state is doing the right thing and I just don't get it yet.


Welcome to the world of questions. 
They're good questions.
Nobody (in power) seems willing to give answers to them.
Few in the media seem prepared to ask them or to follow up on the brush off/prevarication/spoof and bluster that passes for answers in Ireland.


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## room305 (4 Jun 2009)

yoganmahew said:


> Welcome to the world of questions.
> They're good questions.
> Nobody (in power) seems willing to give answers to them.
> Few in the media seem prepared to ask them or to follow up on the brush off/prevarication/spoof and bluster that passes for answers in Ireland.



Keeping asking them though, because eventually we might get answers.


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## PaulHoughton (24 Jun 2009)

Presumably, those who bought Irish bank bonds insured them with credit default swaps, so the real risk was not to bondholders but to their insurers - AIG and the like?

Was this the systemic risk we are so keen to avoid?


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## z109 (26 Jun 2009)

PaulHoughton said:


> Presumably, those who bought Irish bank bonds insured them with credit default swaps, so the real risk was not to bondholders but to their insurers - AIG and the like?
> 
> Was this the systemic risk we are so keen to avoid?


It would make you wonder if the Irish banks (or some of their subsidiaries) were cross-insuring each other's bonds?


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## PaulHoughton (26 Jun 2009)

Do Irish banks write CDSs?


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