Slovenian bank bail-in was constitutional but better shareholder protection needed, court rules

Slovenian bank bail-in was constitutional but better shareholder protection needed, court rules
By bne IntelliNews October 28, 2016

The Slovenian Constitutional Court has confirmed that emergency measures taken by the Slovenian central bank, Banka Slovenije (BS), in 2013 and 2014 were in accordance with the constitution and thus cannot be challenged, BS announced on October 27. However, the court also ruled that the parliament must change the bank bail-in law to give greater legal protection to holders of scrapped bonds and shares in banks that received state help.

In 2013, Ljubljana had to step in to recapitalise several major banks, heavily burdened by bad loans, narrowly avoiding an international bailout. This included the restructuring of five banks - Nova Ljubljanska Banka (NLB), Nova Kreditna Banka Maribor (NKBM), Abanka Vipa, Probanka and Factor banka; Banka Celje was added to the list a year later. The six banks received €3.6bn of capital from the government in 2013 and 2014.

The 2013 bail-in resulted in around €600mn of losses for subordinated bond holders and small shareholders. The Court of Justice of the European Union said on July 19 that hat the bail-in was legal. However, it also said that a European Commission banking communication, cited by the Slovenian authorities in their decision to wipe out junior debt, was not binding. In addition, while backing the principle of burden sharing by subordinated debt holders, it said the burden should be shared only to the extent necessary - a statement that left room for interpretation.

The court has given the parliament six months to enforce the necessary changes, which were needed to “balance the weak position of the banks' investors in comparison to the Bank of Slovenia," the court said, Reuters reported. However, the court did not say that the decision of the BS to scrap shares and subordinated bonds in troubled banks was unconstitutional.

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