Cyprus Rescue Shows European Bank Union Needed, S&P Says

The rescue of Cyprus, which wiped out bank bondholders and taxed savings, shows Europe needs closer coordination of banking policy, according to Standard & Poor’s Ratings Services.

European leaders need to strengthen supervision and give investors clarity on how they will react to bank insolvencies in the future, S&P said in a statement today. Setting up a fund to wind down failed banks across Europe would also help break the link between indebted states and their banks, S&P said.

Europe broke with tradition this month by forcing losses on senior bond investors and imposing a levy on deposits of more than 100,000 euros ($128,000) in its rescue of Cyprus. That plan showed countries in the currency union are reluctant to use taxpayers’ funds to prop up banks in other states, S&P said.

The rescue may create a precedent and “future cross-border support programs, if required, may similarly be less supportive of banks’ senior creditors than previously,” Richard Barnes, a London-based S&P credit analyst, said in the statement.

European leaders have sought to quash that notion and pushed back against the impression Dutch Finance Minister Jeroen Dijsselbloem gave this week that the swoop on bank accounts and bonds could be replicated elsewhere.

The measures in Cyprus were tailored to the “exceptional” situation of the country, according to a document drafted by representatives of euro-zone finance ministries. Cypriot banks are heavily reliant on deposits rather than debt for funding.

Senior Creditors

European banking shares rose today, led by UniCredit SpA (UCG), Italy’s largest bank, which climbed 2.6 percent to 3.37 euros by 12:41 p.m. in Milan trading. The 28-company Euro Stoxx Banks Index (SX7E) advanced 1 percent.

Individual governments will probably still support senior creditors of systemically important domestic banks if they have the funds to intervene, S&P said.

S&P, which doesn’t rate deposit-taking banks in Cyprus or any Cypriot branches of foreign banks, said it doesn’t expect to take “immediate” rating actions on euro-area banks after the rescue of Cyprus.

The rating company did say it could lower its stand-alone credit profiles on European lenders -- its opinion of banks’ creditworthiness without extraordinary support -- if the events in Cyprus “materially raise the cost, or reduce the stability, of the deposits and wholesale funding in other pressured euro- zone countries.”

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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