23/03/17

Think tanks give thumbs down to taxpayer rescue of failed banks

With new rules now in place on how distressed banks in the euro zone should be resolved in the future, a new report on the effectiveness of these bail-in and resolution measures is timely, reports The Irish Times.

Published by the International Centre for Monetary and Banking Studies in Geneva and the Centre for Economic Policy Research in London, it states clearly that “failed financial firms should not be bailed out by the taxpayers”.

The report reminds us that European taxpayers covered more than two-thirds of the cost of resolving and/or recapitalising distressed banks following the crash in 2008.

And that Anglo Irish Bank received €29.3 billion in bailout funds from the State, along with the costs associated with guaranteeing its liabilities.

It also reminds us that there was a zero loss for senior bondholders in Anglo, although the juniors took a 78 per cent haircut and shareholders (including many pensioners) were completely wiped out.

‘Chaotic’ bail-in

In addition, the report cites the “chaotic” bail-in at Cypriot banks in 2013. This resulted in a levy of 47.5 per cent for shareholders, bondholders and depositors with more than €100,000 in the largest two banks, while depositors with less than €100,000 were spared.

This shifted the burden of rescue to wealthy and well-connected individuals and led to pressure on the Central Bank. The authors concluded that the Cyprus bail-in worked although an earlier resolution would have been better.

They recommend that the Single Supervisory Mechanism (SSM), which is responsible for the regulation of banks across the euro zone, should act early and “proactively” even if this creates volatility.

It also calls for the European Central Bank/SSM to maintain a database of the main holders of bail-inable debt, and for changes to bank stress tests to include a “moderately” adverse scenario in addition to the baseline and severely adverse scenarios currently used. And more besides.

With new rules now in place on how distressed banks in the euro zone should be resolved in the future, a new report on the effectiveness of these bail-in and resolution measures is timely.

Published by the International Centre for Monetary and Banking Studies in Geneva and the Centre for Economic Policy Research in London, it states clearly that “failed financial firms should not be bailed out by the taxpayers”.

The report reminds us that European taxpayers covered more than two-thirds of the cost of resolving and/or recapitalising distressed banks following the crash in 2008.

And that Anglo Irish Bank received €29.3 billion in bailout funds from the State, along with the costs associated with guaranteeing its liabilities.

It also reminds us that there was a zero loss for senior bondholders in Anglo, although the juniors took a 78 per cent haircut and shareholders (including many pensioners) were completely wiped out.

‘Chaotic’ bail-in

In addition, the report cites the “chaotic” bail-in at Cypriot banks in 2013. This resulted in a levy of 47.5 per cent for shareholders, bondholders and depositors with more than €100,000 in the largest two banks, while depositors with less than €100,000 were spared.

This shifted the burden of rescue to wealthy and well-connected individuals and led to pressure on the Central Bank. The authors concluded that the Cyprus bail-in worked although an earlier resolution would have been better.

They recommend that the Single Supervisory Mechanism (SSM), which is responsible for the regulation of banks across the euro zone, should act early and “proactively” even if this creates volatility.

It also calls for the European Central Bank/SSM to maintain a database of the main holders of bail-inable debt, and for changes to bank stress tests to include a “moderately” adverse scenario in addition to the baseline and severely adverse scenarios currently used. And more besides.

“For several years to come, the new resolution tools will have to be applied to balance sheets that are not quite ready for it,” the report concludes. “This is bound to create bitter legal and political fights. But the evidence suggests that bail-in can work . . . and with the help of hard-headed policymakers, it can become credible and effective.”