Eurozone guarantees all banks with…taxpayers’ money

ECOFIN Council of 15/11/2013. From left to right: Anders Borg, Swedish Minister for Finance and Wolfgang Schauble, German Federal Minister for Finance. (Council of the European Union photographic library).

ECOFIN Council of 15/11/2013. From left to right: Anders Borg, Swedish Minister for Finance and Wolfgang Schauble, German Federal Minister for Finance. (Council of the European Union photographic library).

Last Friday the ECOFIN council made up by the 28 EU ministers of finance, confirmed that a permanent arrangement for the Single Resolution Mechanism (SRM) and the single resolution fund (SRF) meant to deal with failing banks, will be agreed on before the end of the year covering the period after 1 January 2015. In the mean-time, there will be a guarantee similar to the regular one in place. There is every indication that ECOFIN’s final decision will go along the lines of European Central Bank’s and Commission’s proposals. Let’s take one thing at a time.

It must be reminded that the ECB recently published its opinion on the Single Resolution Mechanism and Fund, largely supporting the European Commission’s position on their enactment, the last crucial step needed to accomplish the European Banking Union. The opinion contains the following three essential requirements for effective bank resolutions: a single system, a single authority with decision-making powers and a single resolution fund financed ex ante by the banking sector.

The time plan

If an agreement is reached within this year, the regulations on the single resolution mechanism and fund will be in force as from 1 January 2015. The ECB however, in view of carrying out its supervisory duty of Eurozone banks as from November 2014 (which is the official Single Supervision Mechanism) has already initiated a preliminary exercise, to be conducted during the next twelve months, in order to test the ground of Eurozone’s unexplored banking constellation.

To this effect, the ECB announced on 23 October that it starts a ‘comprehensive assessment’ of Eurozone banks in advance of its regular supervisory role. The assessment will cover 130 systemic euro area banks accounting for 85% of the total banking system. Those banks will undergo risk assessment, asset quality review and stress test. The exercise starts this month and will be concluded in November 2014.

Testing the banking ground

According to the ECB, the assessment “will consist of three elements: i) a supervisory risk assessment to review, quantitatively and qualitatively, key risks, including liquidity, leverage and funding; ii) an asset quality review (AQR) to enhance the transparency of bank exposures by reviewing the quality of banks’ assets, including the adequacy of asset and collateral valuation and related provisions; and iii) a stress test to examine the resilience of banks’ balance sheet to stress scenarios”.

In conducting this exercise the ECB may find that some banks need urgent recapitalisation or even that one or more of them are ‘beyond limit of repair’. Consequently, the central bank says that if this entire comprehensive assessment of Eurozone banks is to be credible, there has be an arrangement in place to deal with the difficult cases which may arise.

Last Friday’s ECOFIN answered this question as follows, “in the eventuality that the comprehensive assessments/stress tests reveal a capital shortfall, the established pecking order (first private sources, then national and euro area/EU instruments) will apply”. The meaning of this passage is obviously that whatever the capital needs of a certain problematic bank, at the end of the day, it will be the country’s or the European taxpayers (national and euro area/EU instruments) who will be called to foot the bill, for the recapitalisation or the resolution of any bank.

Always the taxpayers

As if this arrangement was not clear enough, the ECOFIN further explained that, “In a first instance, banks should raise capital in the market, retain profits, undertake capital accretive sales and restructuring…If this is revealed not to be sufficient…member states should mobilise all appropriate arrangements for recapitalising banks, if needed, including through the provision of public backstops where appropriate…In the second instance, if national backstops are not sufficient, instruments at the euro area/EU level will be available as appropriate: At the euro area level, European Stability Mechanism instruments may be used in the appropriate sequencing, according to their respective agreed rules and requirements: First, the ESM can provide through its normal procedures financial assistance for the recapitalisation of financial institutions in the form of a loan to a Member State, after appropriate bail-in, in full respect of EU State Aid rules. Second, the direct recapitalisation instrument with its €60 billion ESM exposure limit…”

In brief, if a bank is either to be recapitalised or resolved, at the end of the day the burden will weigh on the unsecured lenders and depositors of the bank (after appropriate bail-in), secondly on the country’s taxpayers (provision of public backstops) and thirdly on Eurozone taxpayers (the ESM). No provision is taken to hold the bankers accountable at least with what they have pocketed from the bank in question, during say the last five years. As for the unsecured lenders and depositors of the bank (above the threshold of €100,000) most of them are either pension funds or real economy businesses. In any case, it will be the civil society to bear the burden of banks’ recapitalisation or resolution (unsecured lenders and depositors, pension funds, real economy businesses, taxpayers).

‘Investors’ interest for banks

That is why there is actually strong interest from ‘investors’ to acquire some Eurozone’s ailing banks (the Greek institutions for example), despite the fact that many of them have been rescued recently with taxpayers money. The increasing devaluation of the banks’ assets (loans in the red and investments turning sour) is not then an impediment for ‘investors’ longing to cheaply buy those failing institutions, since the European taxpayers have undertaken to recapitalise them. It is as if the ECOFIN and the Eurogroup are paving the way for the next financial crisis, by covering the cost of the present one with other people’s money.

 

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

It’s time to get serious about the causes of pandemics: UN report

When will Eurozone’s unemployment rate stop being Europe’s worst nightmare?

Gender equality within junior enterprises: the effect of President’s gender

Planes can now fly for 21 hours non-stop. But are people ready?

COP21 Breaking News: China has promised to cut emissions from its coal power plants by 60% by 2020

Drought in Europe: Commission presents additional measures to support farmers

Flexible jobs can make work-life balance worse, a German study finds

Commission tries to solidify the EU statistical system

Youth not prioritised in new Commission

New rules to help consumers join forces to seek compensation

YouTube stars get creative at UN, to promote tolerance

Renewable energy can get India’s returned rural migrants back to work

The Chinese solar panels suddenly became too cheap for Europe

With human rights under attack, UN chief unveils blueprint for positive change

What can each individual do to lessen the burden of mental health in times of the pandemic?

Millennials (and Gen X) – Here are the steps you should take to secure your financial future

In New Zealand it takes less than a day to start a business

Merkel had it her way with the refugees & immigrants but can Greece and Turkey deliver?

A Sting Exclusive: “Our Great Awakening, Rebuilding in a Culture of Collective Trauma”, by Dr Hokemeyer

It’s time to switch to a four-day working week, say these two Davos experts

Inaction on obesity stands in the way of sustainable development

“China will strive to enhance the performance of economic growth”, President Xi highlights from the World Economic Forum 2017 in Davos

Global spotlight on world drug problem ‘is personal’ for many families, says UN chief

Deaf advocate voices importance of sign languages as UN marks first commemoration

First EU-wide protection for whistle-blowers agreed

Senior UN official strongly condemns Southern California synagogue attack

Eurozone retail sales fall shows recession

Using the quarantine to your advantage

UN’s Guterres condemns ongoing airstrikes on Syria’s hospitals, medical workers

Which countries’ workers spend the longest (and shortest) in retirement?

“Decent working conditions for the young health workforce: what are the challenges and can we find solutions?”

Big world banks to pay $ 4.95bn for cheating customers; Is it a punishment or a gentle caress?

This ‘hidden killer’ is responsible for one in five deaths, and you might never have heard of it

Brexit and migration dominates the debate on October’s EU summit

Mental health as a tool of survival at the Pandemic

Progress made in UN talks to end Yemen war, Envoy lauds ‘positive and serious spirit’

Why Microsoft is a regular to Almunia’s

The Eurogroup has set Cyprus on fire

The Parliament defies a politically biased Banking Union

End discrimination against women and children affected by leprosy

The dark side of Diwali, festival of lights

Libya: €2 million in humanitarian assistance to cover basic needs

Antitrust: Commission provides guidance on allowing limited cooperation among businesses, especially for critical hospital medicines during the coronavirus outbreak

Scale of displacement across Myanmar ‘very difficult to gauge’, says UN refugee agency

How to future-proof India’s economy

Our indispensable problem: the paradox of modern plastics

Quelling antimicrobial resistance: a clinico-pharmacological exigency

A Sting Exclusive: “Our ambition is by 2020 Indonesia to become an emerging power of World’s Maritime Access”, reveals the Chargé d’Affaires at the Embassy of Indonesia in Brussels, treating WEF, ASEAN and EU-Indonesia relations on the eve of the World Economic Forum East Asia 2015 in Jakarta

This is what has led to the George Floyd protests in the United States

Why the 21st century’s biggest health challenge is our shared responsibility

Conditions deteriorating alarmingly in Yemen, warns senior UN official

ECB: Reaching the limits of its mandate to revive the Eurozone economy

Canada and EU officially sign the trade agreement that could open-up the road to TTIP

OECD leading multilateral efforts to address tax challenges from digitalisation of the economy

Franchise India 2016, returns in 14th year 

WEF Davos 2016 LIVE: “Chinese economy has great potential, resilience and ample space for policy adjustment”, China’s Vice President Li Yuanchao reassures from Davos

Syrian civilians must be protected amid ISIL executions and airstrikes: Bachelet

The EU lets the bankers go on rigging the benchmarks

‘Chance for peace’ in South Sudan finally within reach, declares UN Peacekeeping chief

Khashoggi murder trials must public and meet international standards, UN expert urges

More Stings?

Advertising

Comments

  1. great put up, very informative. I’m wondering why the opposite specialists of this sector don’t notice this.
    You should proceed your writing. I’m sure, you’ve a huge readers’ base already!

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s