Bank resolutions set to remain a national affair

ECOFIN Council of 10/12/2013. (Council of the European Union).

Negotiations over the drafts of three key directives destined to mark the future of Eurozone, namely the Bank Recovery and Resolution Directive, the Bank Deposits Guarantees Schemes and the Single Resolution Mechanism remain so elusive, that every minister of Finance when leaving Brussels last Tuesday night set the focus on what his or hers home audience wanted to hear. After last ECOFIN council all ministers addressed their voters in their own languages.

The French Minister for Finance Pierre Moscovici, reassured his compatriots that under the new scheme all member states will be able to borrow at approximately the same interest rate because Eurozone’s financial fragmentation will disappear in a magical manner. The German minister for Finance, Wolfgang Schauble, told his miser compatriots, that taxpayers will not be burdened by foreign falling banks and the Italian minister, Fabrizio Saccomanni, reassured his compatriots, that everything was done to support the competitiveness of the industry in the north of the country.

Lying ministers

Of course, all of them lied in one way or another. For one thing the fragmentation of Eurozone’s financial markets would never disappear because the crazy days of the early 2000s will never come back. Germany and Greece would not, and probably should not, borrow under the same creditworthiness conditions, at least not in the foreseeable future.

As for the burden on Eurozone taxpayers, from the resolution or the recovery of failing or about to fail banks, this is a sure thing. All Finance ministers agreed to “minimise taxpayers’ exposure to losses”. Minimising is a very elastic word and can be drastically expanded. Last but not least, the problems of the Italian banks would certainly be dealt within the country and no other Eurozone member state is disposed to share this burden.

Taxpayers’ money

It doesn’t take an M.Sc degree in economics to understand that it is impossible, in the event of a failure of a medium bank, to guarantee all secured bank deposits (of less than €100,000 per person) and safeguard larger deposits from natural persons and micro, small and medium-sized enterprises (eligible deposits), without taking refuge first to the money of other depositors, through the participation of the deposit guarantee schemes in the resolution procedure. If the money of the guarantee scheme is not enough, and they never are, then the taxpayer will be called in for sure.

Of course, there is a lot of talk about the resolution fund, which would be allowed to cover up to 5% of the liabilities of a failing bank. But this fund needs ten years to be fully capitalized through a levy to all lenders. What will happen in the between? It’s again the ministers who agreed that, “In extraordinary circumstances, where this limit (5%) has been reached, and after all unsecured, non-preferred liabilities other than eligible deposits have been bailed in, the resolution authority could seek funding from alternative financing sources”.

What alternative?

Here comes the interesting point, because it is quite elusive which those ‘alternative sources’ are. No doubt it’s taxpayers’ money, because there is no other money around. Shareholders, unsecured creditors, non-eligible deposits all have been exhausted, along with the resources of the deposit guarantee schemes and the resolution fund, Then what? Obviously then it’s the time for the cavalry, that is the taxpayers.

The Press release issued after the last ECOFIN Council has more on this issue. It says that the Bank recovery and resolution directive “would require member states, as a general rule, to set up ex-ante resolution funds to ensure that the resolution tools can be applied effectively”. As mentioned above, those funds would need ten years to be fully operational ready to undertake the resolution of a medium bank. Again the tormenting question that arises is, until then what?

Given that the ECOFIN progresses in this affair bit by bit it’s yet to be decided what will happen then. Nevertheless the above quote tells us that the resolution funds will be many, one in every country and not a central one. Probably, after ten years, when they will be dully capitalized they could merge in one. Until then however the extra money needed in an eventual bank resolution would come from the member state or states where the lender is active.

In short, the pattern followed in the resolution of the Belgian bank Dexia and the resolution and the recovery of the two Cypriot banks, the Bank of Cyprus and the Popular Bank , will constitute the guiding lines of any eventual bank resolution or recovery in the next few years. If the implicated country cannot borrow in the market enough money, only then the Eurozone will use its common resources to support the member state with loans, probably from the wealthy European Stability Mechanism. The German taxpayer will never bailout an Italian banker free of charge…