EU: The Member States to pay for national banking problems

According to information released by global media, this week the European Union is about to conclude the discussions on its major new project, the Banking Union, with an arrangement providing that the cost of eventual bank resolutions and recoveries is to burden the country or countries where the bank in question is conducting its business. Last week, on 12 December, the European Sting posted an article entitled “Bank resolutions set to remain a national affair” on this issue stressing that, “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”. After the EU and the European Central Bank forced the Irish, the Belgian, the Spanish and the Cypriot governments to use their taxpayers’ money to bailout the Bank of Ireland, the Allied Irish Banks, Dexia Bank, Bankia and a large number of regional Spanish ‘Cajas’, the Bank of Cyprus and the Popular Bank, the Eurozone couldn’t now change course and mutualise the costs of bankrupt lenders. ECOFIN discusses it This was more or less evident even from last week’s ECOFIN council. The official text of the “Main results of the Economic and Financial Affairs Council” contained the following paragraph: “Under the Council’s general approach, a contribution of the resolution fund would be capped at 5% of a (failing) institution’s total liabilities. In extraordinary circumstances, where this limit 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”. But it is more than evident now and for the next few years that no ‘Resolution Fund’ will be fully capitalised (by all Eurozone lenders) as to use its resources in an eventual bank failure. In reality, the Resolution Fund doesn’t exist today nor have the details of its governance and functions been decided yet. The EU’s Single Resolution Fund is planned to be set up next year, but it will start recapitalising struggling banks or pay for their resolution after it is fully capitalised itself (through a levy on banks). Understandably the Fund will be fully capitalised by all Eurozone lenders and will be ready to undertake its tasks in full in 2023. Until then what? Mutualisation in retrospect? The answer to this question is given in the first sentence of this article, with member states exchequers undertaking the cost of resolution and recovery of Eurozone’s banks. After some years, with the progressive capitalisation of the Single Resolution Fund with a levy on banks, the Eurozone may progress towards a mutualisation of the bank bankruptcies costs and start sharing the common resources of the Fund. And at that time also the Fund’s involvement will be capped to 5%, of “the failing institutions total liabilities”. There is one more reason that the cost of resolving failing banks cannot be mutualised right away. As mentioned above Ireland, Belgium, Spain and Cyprus were forced to bailout their private banks with taxpayers’ money. If within next year or the year after, the Resolution Fund (capitalised by all Eurozone banks) would hypothetically rescue an Italian bank and save the Rome’s exchequer the cost, the next day Ireland, Spain, Belgium and Cyprus would come at roof tops demanding the same treatment. Ireland would ask that the Single Resolution Fund should pay in retrospect for the recovery cost of the Bank of Ireland and the Irish Allied Bank of around €65 billion still burdening the country’s taxpayers. Not to forget that the Irish sovereign debt (to be paid by taxpayers) is today 120% of the GDP (44% in 2008) and this is so just because the country’s exchequer had to borrow tens of billions of euro to save those two banks. Under those circumstances, the Irish demand would seem totally legitimate, because it was not only the money that burdened this country of 4.5 million people, but also the suffering due to skyrocketing unemployment, increased taxation, reduced social spending and of course three years of social and political perturbations. This means the Single Resolution Fund, probably aided by the European Stability Mechanism, when starting after a few years getting involved in bank resolutions, should first commence its activities by directly covering the costs the of old bank rescues in Ireland, Spain, Cyprus, Belgium and probably Greece. This could come at a total cost of anything around €200bn. In such a case the sovereign debt burden of those countries will decrease by the same amount. So it’s more than certain, that during the next few years nothing will really change in bank resolutions, and the issue will remain a national affair. However when the Single Resolution Fund is to start its activities, the old rescues of banks in Ireland, Spain, Cyprus, Greece and Belgium will be reviewed again. The result will be to relieve the sovereigns from a part or the entire cost of bank bailouts making the lenders to pay for their carelessness in retrospect.