Commission wants EU bank wind-up funds

Scofflaw

Courtesy of the EU Ireland mailing list:

The European Commission is today proposing that the European Union establishes an EU network of bank "resolution" or wind-up funds.

The funds would not be used for bailing out or rescuing banks, but to ensure that a bank's failure is managed in an orderly way and does not destabilise the financial system.

The Commission wants the money to come from a levy on banks, based on common EU rules and the "polluter pays" principle. While some Member States are already levying their banks, the lack of common rules means that there is a risk of market distortion i.e. that there may no longer be a level-playing field between different countries' banks.

The Commission's proposals will be put on the table to governments at the forthcoming European Council meetings in June. (Finance ministers 8-6 June, Heads of government 17-18 June). If political agreement is forthcoming, the Commission will then present these ideas at the G-20 Summit in Toronto on 26-27 June 2010.

These funds would form part of a broader framework aimed at preventing a future financial crisis and strengthening the financial system.

Internal Market and Services Commissioner Michel Barnier said: "It is not acceptable that taxpayers should continue to bear the heavy cost of rescuing the banking sector. They should not be in the front line. I believe in the 'polluter pays' principle. We need to build a system which ensures that the financial sector will pay the cost of banking crises in the future. That is why I believe that banks should be asked to contribute to a fund designed to manage bank failure, protect financial stability and limit contagion – but which is not a bail-out fund. Europe must take a lead in developing common approaches and providing a model for cooperation which could be applied globally."

The Commission Communication, FAQs, etc on it are here.

Interesting proposal - a sort of European banking industry-wide insurance fund for winding up banks. Part of the idea seems to be to ensure that no bank is "too big to fail" - instead of either tearing a huge hole in the economy by sudden collapse or being bailed out, the stabilisation fund would ensure it could be wound up gradually without cost to the taxpayer.

Will the Member States adopt it, I wonder?

cordially,
Scofflaw

ei.sdraob

Scofflaw wrote: »

Will the Member States adopt it, I wonder?

hopefully the will, tho bolt the stable door after the horse has bolted springs to mind

if there was a US style FDIC entity we could have shown the finger to certain banks

silverharp

Note at the moment that the FDIC is running out of money. Its not a bad idea once the risks are teased out, a future Anglo should not get a free ride if it is just a straight % of deposits.
But as above, barn door and bolted come to mind

Scofflaw

ei.sdraob wrote: »

hopefully the will, tho bolt the stable door after the horse has bolted springs to mind

Indeed, it's never likely to happen again!

amused,
Scofflaw

ei.sdraob

Scofflaw wrote: »

Indeed, it's never likely to happen again!

amused,
Scofflaw

dont worry by socialising the risks it will happen again, on a much worse scale

tho this wont help us with our existing problems

Scofflaw

ei.sdraob wrote: »

dont worry by socialising the risks it will happen again, on a much worse scale

tho this wont help us with our existing problems

It's unfortunate that it tends to take a crisis to create the will for actions that, had they been taken earlier, might have averted or mitigated the crisis. People forget, I think, that achieving anything political takes a lot of work.

This seems to me, though, a pretty good stab at eliminating the moral hazard caused by the "too big to fail" problem.

cordially,
Scofflaw

SkepticOne

Scofflaw wrote: »

It's unfortunate that it tends to take a crisis to create the will for actions that, had they been taken earlier, might have averted or mitigated the crisis. People forget, I think, that achieving anything political takes a lot of work.

This seems to me, though, a pretty good stab at eliminating the moral hazard caused by the "too big to fail" problem.

The danger is that it moves that moral hazard from the institution up to the higher level of national government as it lessens the need to create a tight regulatory regime at that level.

dan_d

Scofflaw wrote: »

It's unfortunate that it tends to take a crisis to create the will for actions that, had they been taken earlier, might have averted or mitigated the crisis. People forget, I think, that achieving anything political takes a lot of work.

This seems to me, though, a pretty good stab at eliminating the moral hazard caused by the "too big to fail" problem.

cordially,
Scofflaw

Still got to do it though. That's how humans work I think. A lot of exposure to health and safety in the building industry has lead me to realise that - every new measure tends to be introduced after the accident has happened.

In this case, although anyone with half a brain could see things were going to go wrong, it's got to be done, and done now.

SeanW

I agree this is a reasonably good idea. Not a big fan of the idea of bank-failure intervention as it guarantees that a cautious bank (or populace) will be footing the bill for a reckless bank, but since we have established the precedents of bank failure intervention and "too big to fail" having a big pot of money that stands ready to take over only after a bank has collapsed, serves the dual aim of protecting stakeholders while eliminating the moral hazards that banks currently face. Just too bad we didn't start 10 years ago.

I hope the idea is a success.

ClayDavis

While I think it's a good idea to have something that enables us to let banks fail and the losses broadly fall to the responsible institution, there are a couple of problems with it.
AFAIK, Sweden have alread established a "bank stability" fund which they expect to raise about 2.5 per cent of gross domestic product within 15 years. It was reading these figures made me think that if you look at the losses to the taxpayer with these current bailouts, any fund is likely to be dwarfed by the size of the problem. Then we end up in a scenario that led to our bank guarantee, where in spite of the first €100,000 of deposits being safe the scale of the problem "required" a 100% guarantee. If you were to establish a fund of the size required the levy would push up the cost of financial transactions substantially. This wouldn't merely effect the big boys, this would increase the cost of banking for your ordinary person. As a result, customers
Also this interested me from yesterday's FT

The Financial Times wrote:

The Institute of International Finance, the global banking industry group, supports taxing the industry to pay the residual costs of winding up failing banks but argued in a report yesterday that an after-the-fact levy would be preferable.
"The problem with [upfront] funding is that it increases the moral hazard. . . Once banks have paid and the fund exists, it becomes very difficult to let a bank fail," said Peter Sands, chief executive of Standard Chartered and chairman of the IIF regulation committee.
hazard.
From here

This kind of measure does strike me as useless if it isn't accompanied with proper regulation backed up by robust enforcement policies.

SeanW

SkepticOne wrote: »

The danger is that it moves that moral hazard from the institution up to the higher level of national government as it lessens the need to create a tight regulatory regime at that level.

I'm not sure how it creates a moral hazard for government, though I am open to correction here.

I for one have always maintained that we don't need regulation as much as non-intervention. This is satisfactory in that if implemented, banks that find themselves in peril will now fail, but the fund will be there to allow depositors etc to compensated. The insurance may also provide the side-effect of automatically granting confidence to even the shakiest banks, which while not totally positive does have the virtue of practically eliminating the possibility of a bank failing for any reason other than its own malinvestments.

Edit: the most important thing for me is that we get rid of "too big to fail" and that a clear message is sent out that any bank that does collapse will not (as an organisation) be rescued.

Scofflaw

ClayDavis wrote: »

While I think it's a good idea to have something that enables us to let banks fail and the losses broadly fall to the responsible institution, there are a couple of problems with it.
AFAIK, Sweden have alread established a "bank stability" fund which they expect to raise about 2.5 per cent of gross domestic product within 15 years. It was reading these figures made me think that if you look at the losses to the taxpayer with these current bailouts, any fund is likely to be dwarfed by the size of the problem. Then we end up in a scenario that led to our bank guarantee, where in spite of the first €100,000 of deposits being safe the scale of the problem "required" a 100% guarantee. If you were to establish a fund of the size required the levy would push up the cost of financial transactions substantially. This wouldn't merely effect the big boys, this would increase the cost of banking for your ordinary person. As a result, customers
Also this interested me from yesterday's FT:

The Institute of International Finance, the global banking industry group, supports taxing the industry to pay the residual costs of winding up failing banks but argued in a report yesterday that an after-the-fact levy would be preferable.
"The problem with [upfront] funding is that it increases the moral hazard. . . Once banks have paid and the fund exists, it becomes very difficult to let a bank fail," said Peter Sands, chief executive of Standard Chartered and chairman of the IIF regulation committee.

This kind of measure does strike me as useless if it isn't accompanied with proper regulation backed up by robust enforcement policies.

That's true of almost anything, though. I'm not sure that IIF quote makes sense - he's saying that having a fund that can be used to wind a bank down rather than giving it a bailout creates more moral hazard than bailing them out because you can't afford to let them fail?

Here's another version (perhaps clearer) of the argument:

Urs Rohner, the Credit Suisse vice-chairman who headed the group that did work on cross-border failures, said his group decided an after-the-fact payment was preferable because the existence of a prepaid fund would put pressure on regulators to save rather than shut down troubled banks.

Personally, I can't see what the difference would be between knowing that there would be funding from a post-facto fund as opposed to a pre-levied fund. If anything, I would think that at a time of banking crisis, other banks will howl and cry if they're asked to stump up a levy, increasing the risk that life support would have to come from the taxpayer - so this looks to me like the opening (and perhaps weakest) salvo in the battle over the shape of such a fund.

As to amounts:

Analysts at Deutsche Bank recently estimated an EU-level fund would need to amount to about €120bn- €140bn (£103bn-£120bn). By comparison, an earlier EU paper calculated that if the entire bloc followed Sweden’s example and imposed a levy of 3.6 basis points on all loans, it would raise €15bn a year.

Analysts at Morgan Stanley recently concluded that such a levy was likely to cut annual earnings per share by 2 to 5 per cent, depending on the size of the tax and the bank involved.

That would give us about 8-9 years for the fund to reach full value, which seems reasonable.

cordially,
Scofflaw

sceptre

ei.sdraob wrote: »

hopefully the will, tho bolt the stable door after the horse has bolted springs to mind

if there was a US style FDIC entity we could have shown the finger to certain banks

As I've mentioned before, bolting (or at least keeping closed) the stable door after the horse has bolted is a good thing to do if there's a chance of you having another horse.:)

SkepticOne

SeanW wrote: »

Edit: the most important thing for me is that we get rid of "too big to fail" and that a clear message is sent out that any bank that does collapse will not (as an organisation) be rescued.

I don't think it gets rid of that either. If this fund was in place now, I could see them using it to resolve Anglo and the money saved could then be used to prop up BOI and AIB.

What it does do is insure the government against depositors being wiped out en-masse when a bank fails. It is this sort of event that can bring down a government. But with all insurance there is the potential for moral hazard. I could see a return of Neary and Hurley style regulation under this fund.