The banks want now free capital from taxpayers

Benoît Cœuré, Member of the Executive Board of the European Central Bank (ECB), participated at the conference "Financial Stability and the Single Market – The Keys to Growth in Europe". (EC Audiovisual Services).

Benoît Cœuré, Member of the Executive Board of the European Central Bank (ECB), participated at the conference “Financial Stability and the Single Market – The Keys to Growth in Europe”. (EC Audiovisual Services).

Benoît Cœuré, a Member of the Executive Board of the European Central Bank, delivered a speech today on “The implications of bail-in rules for bank activity and stability”. This was the opening speech at conference on “Financing the recovery after the crisis – the roles of bank profitability, stability and regulation”, staged by Milan’s Bocconi University. He appeared quite convinced that “a well-designed, comprehensive and consistent regulatory framework for banking resolution, including creditor-funded recapitalisation schemes, will mitigate excessive risk-taking phenomena. By improving financial stability, it would also have a favourable long-term impact on the real economy”.

The Bank Recovery and Resolution Directive ( BRRD) is currently under discussion at the European Parliament and there is every indication that it will get the green light from the legislators with only minor amendments. Understandably its core provision will remain the seniority line of bailinable bank creditor assets (bail-in funds), touching last the holders of unsecured deposits (above €100,000). In case of resolution, those assets will be used to pay for the bank’s secured obligations mainly to deposits below €100,000, and only if they are not enough, there will be recourse to taxpayers, through a government contribution.

It’s not clear and probably it will remain this way, up to which percentage the resolution authority is to ‘use’ (rather confiscate) the unsecured deposits, and which will be the golden cut between this source of bail-in money and the taxpayers’ contribution in covering the resolution cost. In the case of the two Cypriot banks the unsecured deposits were confiscated up to around 80%. But on that occasion, the Bild-Zeitung was convinced that the money belonged to Russian oligarchs and they could do without. So the knife reached the bone at the four fifths. What if it was a German bank and the unsecured deposits belonged to the country’s SMEs and some rich persons? Would the cut have been as deep as in Cyprus? Rather not. Cœuré didn’t give us any clues on that. On the contrary he wanted to convince us that the BRRD will be the the perfect tool to refrain the banks from undertaking risky bets with other peoples’ money. But even this is just the upper part of the banking…iceberg.

What the banks want now

This was not the only dark point this member of ECB’s Executive Board left untouched. While the core issue is the way the banks are making money, he only had to say that the BRRD, which will be in force somewhere around 1st January 2018, will tackle also the moral hazard in banks’ carelessness, by brandishing a possible resolution if the bank doesn’t behave…Yet again it won’t be the bankers’ money to be bailined but other people’s.

He added that until that date the Commission has adopted “Additional to the bail-in rules… applicable as of the 1st August, 2013. These rules demand mandatory capital write-down and bail-in of subordinated debt before any public supports is granted”. Again those rules do not impose exact ratios between capital write downs and bailinable subordinated debt on the one side and public support on the other. The issue is left open for the strong banks and countries to apply the rules according to their interests.

Capital for the guys

In detail according to the relevant “Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (‘Banking Communication’)…the basis for the pre-notification will be a capital raising plan established by the Member State and the bank and endorsed by the competent supervisory authority. It should: (a) list the capital raising measures to be undertaken by the bank and the (potential) burden-sharing measures for shareholders and subordinated creditors…”.

In short until 1st January 2018 member states and banks can agree between them the kind of state aid they choose fit in their case, “in the context of the financial crisis”. This last observation means the threat of a crisis can cure all the sins hidden in this government – bank agreement, to be surely “endorsed by the competent supervisory authority”.

There is more however. Eurozone’s banks hold between them ‘assets’ of around the triple of the euro area’s GDP that is around €25 trillion. In order to comply with the rules of Basel III requirements it has been estimated that they should shed (sell) some €3.2 tn of them. The problem is that a lot of those ‘assets’ are of a much lower value that what is written in the banks’ books. Shedding them means there should be an immediate write down of capital that the banks don’t have.

In view of that the European Union gives its banks four years until the 1/1/2018 in order to accumulate enough profits and recapitalise themselves. But which will be the source of those profits nobody tells clearly. To this effect the ECB decided to open wide its coffers to the liquidity ‘needs’ of banks. Now it reassures them that interest rates will remain at their present (0.5%) or lower level, in the foreseeable future. Not to forget that the ECB has already supplied the banks as from the beginning of this year with €1tn of long term liquidity at 0.5% interest.

No more liquidity

Still the banks are returning large parts of this money. They could have lent that money at much higher interest rate to creditworthy borrowers in the real economy, but they don’t do that. Why? The answer is simply that their balance sheets are so full of ‘placements’, that at the current levels of capital it is impossible to increase their ‘asset’, aka loans. Who cares about the real economy? Of course not the banks.

Unfortunately for the banks though the ECB cannot give them this money as a gift, to pass it to their capital. It’s already too much that the central bank lent out that trillion euro without any extra collateral, from any of the 6,000 Eurozone banks. On top of that all that money was charged with only 0.5% interest rate, the same for everybody. Consequently the banks are now thirsty for free subsidies from governments/taxpayers in the form of new capital, as the English and the American banks got three years ago.

It is then highly probable that if the narrow path leading up to 2018 will prove rough, we will witness a number of bank recapitalisations at the expenses of taxpayers. The above Commission Communication sets the appropriately relaxed rules exactly for that. As it is clear the banks do not want any more free liquidity from ECB, they want now free capital from taxpayers.

 

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Comments

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