‘Free state aid’ for imprudent banks

Michel Barnier, Member of the EC in charge of Internal Market and Services, on the right, received representatives from the Portuguese Banking Association (APB). (EC Audiovisual Services).

Michel Barnier, Member of the EC in charge of Internal Market and Services, on the right, received representatives from the Portuguese Banking Association (APB). (EC Audiovisual Services).

Over the past few years the Commission’s approval for government rescue of imprudent banks, under the EU state aid rules, has become a cliché. As if those rules do not exist, when it comes to banks. On every other state aid case granted by national governments to the private sector, the Commission remains adamant and examines the slightest detail before giving the green light.

This past week it was the turn of Crédit Immobilier de France to get the Brussels permission for an €18 billion rescue plan drafted by the French government, in favour of this major lander. The week before it was the Dutch SNS REAAL financial group to be favoured by a Commission green light over the salvation package accorded to it by the government of Holland.

Invariably the Commission accords a temporary approval, which is usually extended again and again, on the grounds that the bank every time in question cannot be left to rot. Consequently the Commission asserts, that the bailout “is necessary to avoid a knock-on effect on the country’s banking system”. True, whenever a bank is about to go bust the country’s monetary authorities are obliged to run to its rescue, because no Eurozone government can bear the cost to watch its citizens lose their deposits. In this way the depositors of every Eurozone bank are being held by it, in a peculiar way, as hostages forcing the authorities to rescue them. However, together with the depositors governments are bailing out the management and the shareholders of the bank.

It is equally true thought, that while depositors are totally innocent of the acts that led the bank to catastrophe, shareholder and management not only profited from it but they did what they did in foul knowledge of the risks. Still, they used the depositors’ money to finance high risk placements that most of the times lead to dead ends. The interesting thing is that all this financial vagrancy is not illegal and shareholders and management cannot be held responsible under the law.

In short, almost in all bank failures there are three quite intolerable circumstances. Firstly the banks are free to drive themselves bust, while using other people’s money chasing high but risky returns. Secondly the banks use their depositors as hostages, when it comes to the demand for a government rescue, and thirdly the European Commission invariably approves all those state aids as necessary, because the  Eurozone must avoid a crisis.

However in all those steps there are rules or lack of them, that permit to bankers behave this way, without breaking the law. It is clear then that for as long as the financial rules remain unchanged, banks will continue behaving like that. This means the ball is in the political court, practically making responsible for all this affair the European Commission and all the relevant EU authorities.

Unfortunately there are no signs of political willingness to change this arrangement. Even the Basel III criteria for banks’ capital adequacy were recently relaxed, in order to make the come-back easier for all and every careless financial firm.

 

 

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