Tag Archives: banks

Commission’s Consultation on Bank Failures – Too Little, Too Late?

The European Commission has launched a consultation on technical details underpinning a European crisis management framework for the financial sector. The main measures proposed:

  • Preparatory and preventative measures such as a requirement for recovery and resolution plans and powers for authorities to require banks to make changes to their structure or business organisation where such changes are necessary to ensure that the institution can be resolved;
  • Powers for supervisors to take early action to remedy problems before they get out of hand such as the power to change the managers;
  • Resolution tools which empower authorities to take the necessary action, where bank failure cannot be avoided, to manage that failure in an orderly way;
  • A framework for cooperation between national authorities.

The two main principles proposed by the Commission are:

  • Effective arrangements which ensure that authorities coordinate and cooperate as fully as possible in order to minimise any harmful effects of a cross-border bank failure, and
  • Fair burden sharing by means of financing mechanisms which avoid use of taxpayer funds.

Now, the problem is that we already have a situation that may well get out of hand. Fortune has quoted Scott Minerd, chief investment officer at Guggenheim Partners, who thinks the entire banking system of Europe could be on the brink of disaster (I recommend reading the whole article). If this is true, the Commission’s initiative will not have the time to translate into meaningful EU policy. More, the proposal is not sufficient to solve the problems of the EU banking sector, which is heavily exposed to sovereign debt.

Scott Minerd says that it’s now up to Germany to take leadership in organizing a fiscal union and creating a common EU bond. He rightly points out that this means a true federalization of the European Union, since fiscal policy will be, to some extent, managed on EU level.

In other words the impending banking crisis in the European Union could result in a true federalization – the dream of the founding fathers of the EU. But it sounds simpler than it actually is. Many things can go wrong, and the markets are not exactly ready to accommodate the Hamletian dilemmas of EU Member State governments. The recent approach of Germany and France to coordinate positions and try to sell them as unconditional proposals is not sustainable. EU governments should discuss options multilaterally, taking into account varying positions and nuances. We need true European consensus on fiscal governance, not empty declarations on the centrality of the Economic and Monetary Union.

Whither New Stress Tests for European Banks?

The European Commission is calling for new stress tests for European banks. The reason? Well, it appears that the previous stress tests during the summer failed to spot huge problems at the heart of Ireland’s financial institutions.

Oli Rehn is quoted saying that Ireland’s banking meltdown was a one-off case that would not be repeated elsewhere in Europe. Well, I disagree.

Back in July I noted that stress tests must also include really worst-case scenarios, as in worst-case scenarios. Worst, not best. And all of them. We know that summer stress tests failed to do that. Now we are led to believe that the new stress tests will do the job. That is unlikely.

The problem is analyzed very well by Richard Field. He claims that there is only one way to restore trust and erect a firewall against contagion. Governments must make the statement about which banks are or are not solvent in their system and make the asset-level data available to support it.

Calls for Burden Sharing for Bailouts

Euractiv reports that representatives of Europe’s major banks and financial industry players have issued a joint appeal, calling for progress on supporting transnational financial groups in the event of crisis.

This call is quite well scheduled, since at least one source is saying that the banking crisis in Europe will be much worse than in the United States.