Copenhagen, 30/03/2012 (Agence Europe) - Prevention is cheaper than cure. At the ECOFIN Council in Copenhagen on Saturday, EU Internal Market Commissioner Michel Barnier will be presenting ministers with his views on the future EU bank crisis management system for dealing with bankrupt banks. The proposals have already been discussed four times at other ministerial meetings. They aim to establish a culture of prevention in the banking industry in order to cope better with bankrupt banks next time round. Controversial and legally complex, the draft legislation will be unveiled before the G20 summit next month, at a time that the European Commission believes will be favourable given the improvements in the sovereign debt crisis. A Green Paper will be published before the end of the year setting out suggested preventative measures for non-bank bodies, such as central derivatives clearing houses and issuers of CDS.
Barnier has said that prevention is cheaper than cure and cure is cheaper if prepared ahead of time. The proposals are not designed for any particular member state, he said, commenting that Spain is carrying out a useful and important restructuring of its banking industry, hard hit by the collapse of the property bubble. The new EU rules will be in place in the medium to long-term, rather than to deal with any immediate problems. If the new system had been in place at the time of the collapse of US investment bank Lehman Brothers in 2008, then the commissioner's department says that the only European bank failure that would not have been averted is that of Anglo-Irish Bank.
Anxious to submit balanced draft legislation, Barnier explained the EU's “toolbox” that will be made available to national supervisory bodies so they can take action to prevent, contain and manage bust banks. All banks will be required to prepare and submit living wills to supervisory bodies, setting out what they would do in the event of bankruptcy, rather like the environmental disaster plans of local authorities. The banks are not overjoyed at the idea, although some have already prepared living wills, because they prefer to keep their strategic business priorities under wraps, explained a European source. Public restructuring committees will be set up, coordinated by the European Banking Authority. Taking over from existing supervisory committees, they will make use of the toolbox to ward off a bank's collapse. They will have the power to sell assets, find cash hidden away on the balance sheet, sack the managers of failing banks and hive off toxic assets into separate bodies. The problem here is the fragmentation of bankruptcy laws in the EU, which give powers to differing bodies in the member states (the treasury, finance ministers, justice ministers or others).
“Bail in”. The most controversial measure is the bail in system. Barnier said that bailouts are paid for by taxpayers, whereas shareholders and lenders will pay for bail-ins. If a bank goes bust, shareholders make an exodus, but the holders of bonds tend to stay put because they have thus far always benefitted from the implicit guarantee granted by the government, which always comes forward to bail out banks and prevent the collapse of the banking system. A source at the Commission said that in certain circumstances, the Commission was saying that lenders had to pay up and this would smash the vicious circle of financial crises deepening sovereign debt and then ricocheting off to worsen bank finances.
Banks going bust ask for cash to bail them out, but the draft legislation is not expected to cover finance as such. The European Commission hopes that the matter will be settled in the current talks on the updating of savings guarantee systems (see EUROPE 10555). The talks are focusing on exactly how big a fund is needed in each country to be able to guarantee the first €100,000 of each individual's savings. The European Parliament says that 1.5% of deposits would be enough, the Council of Ministers 0.5%. Warned by banks of just how expensive such changes would be, the Commission has agreed to let the cash in the national guarantee schemes be used to bail out banks, if necessary. Barnier said he was open to the idea of the funds serving a mixture of purposes. The savings guarantee talks are dragging out and a second reading under the co-decision procedure will be required, which is unusual for financial regulations. The commissioner's department suggest it is a question of turning an evil into a good. (MB/transl.fl)