Depositors are wary of Irish banks – are they right?

17 February, 2011

So can senior bank bondholders be singled out for “burning”?  Many general election candidates are playing hairy-man politics and insisting that the new government should do just that, with or without EU/IMF agreement, while of course not touching depositors at all.

Meanwhile, in Denmark, Amerganbanken has gone bust, and depositors with assets over €100,000 (the amount guaranteed by the national deposit protection scheme) suffered a haircut alongside senior creditors, despite the bank being taken over by the state agency responsble for failed banks.

Just what are the legal arguments as to whether or not depositors can be treated differently from senior bondholders?  Does it depend on the wording of the individual bonds, or do all bonds conform to a standard set of terms and conditions?  Or is the issue governed by general legal principles which an Irish court would have to determine?  Why has nobody issued clarification on these questions?

So should somebody with (say) €200,000 on deposit with AIB be worried?  Life is never risk-free, so the question people are asking is whether the interest rate they are getting with an Irish bank is sufficiently high to compensate for default risk, when compared to the rate offered by a safer (?) non-Irish bank, or an Irish subsidiary/branch of a foreign bank.

Can somebody of an expert and trustworthy nature please throw some light on the exact position?  That is to say, can senior bank bondholders legally be singled out for “burning” without depositors having to share the pain?   Until then, I am staying away from Irish banks.

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