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Thursday, September 26, 2013

An EU bank bailout facility?

Bloomberg reports on a potential proposal by the European Commission to alter the EU’s ‘Balance of Payments’ (BoP) facility to allow it to aid banks which may need to be recapitalised in the aftermath of next year’s ECB Asset Quality Review and the EU's bank stress tests.

As a reminder, the BoP facility was originally created to aid countries with currency crises that may impact the rest of the EU or the fundamental stability of the state. It has since been adjusted to apply to only non-euro members and seen its scope widened slightly with its budget increased to €50bn due to the financial crisis. It is guaranteed by the EU budget and therefore ultimately by the member states - with the UK underwriting around 14-15%.

What is the rationale behind this move?
  • Next year’s stress tests are hopefully going to be the most stringent and comprehensive so far, yet there are fears that, without clear aid to help banks found to be in trouble, supervisors may shy away from revealing any deep problems.
  • This is backed somewhat by the ECB’s insistence that the stress tests will not be able to be effective unless there are clear backstops for banks in place.
  • The eurozone does have some form of backstop in the shape of the ESM which can provide aid to banks (via states) but also has a direct bank recap tool.
Can it be done?
  • The most likely approach would be to use Article 352 (the flexibility clause) to adjust the regulation establishing the facility.
  • However, the facility also has a treaty base, Article 143, which specifies lending to states. For this reason, it seems unlikely that a direct recapitalisation tool could be added but a credit line which is lent to states to solely aid banks could potentially be. This could come with less or more specific financial sector conditions than other loans (for example see ESM and Spanish bank bailout).
  • This would require unanimous approval in the Council. So far, Germany and the UK have expressed scepticism based on the fear that a backstop would reduce the pressure on banks (and their governments) to reform and clean up ahead of the tests.
Could it be significant?
  • Yes. If it were approved it would create a collective fund to salvage banks should a member state be unable to deal with the problem alone. If the UK were to approve the move it could open up the door for future pay-outs of funds to aid other countries' banks – decisions taken under qualified majority voting. 
  • Furthermore, it also seems to be driven by events in the eurozone. Firstly, it seems an attempt to extend this centralised banking union model (to break the so-called sovereign-bank loop) to the entire EU - even though the other countries have already rejected this to a large extent. If they really wanted to join the banking union, which some might, there will be chances for them to engage directly.
  • The creation of the fund would raise some serious questions. Will this backstop exist without strong influence over the amount of risk taken in or the relative size of banking sectors to governments across the EU? If so, surely that creates a moral hazard problem. If not, it would necessitate far greater powers over member states' financial sectors. 
  • Lastly, it highlights the level of concern around the health of many of the EU's banks. This was furthered by the EBA's recent assessment that the largest EU banks are some €70bn short of where they need to be to meet the new Basel III rules.


Anonymous said...

This looks like contagion to me;

- Why should the EU budget be used to fund problems created and not resolved by the Mananazone?

- Why should Non-Euro members' money be used to resolve a problem that resides with nations who are Euro members?

- Will any of us be able to take seriously yet another EU bank stress test?!


Rik said...

OE seems to miss the most important point.
Why should the UK underwrite Euro-Zone problems that Germany and Co do not want to underwrite?
Legal is only a minor issue.

This is the main issue. It is clearly a pure EZ problem. Now Germany and Co make problems about underwriting recaps of Southern Banks the problem is transferred to the EU as a whole. Completely ridiculous.
Imho Cameron/Osborne should kill it right away.

On the banking stresstest. Seems to be dodgy excercise 3.0 or 4.0 in this respect. The talk is about 50-100 Bn extra capital required. This is in no way enough to make the Southern banksector healthy again.
Totally pathetic btw that a consultancy is used for that that messed up some of the earlier stresstests. Very simple look at late payments, look at roll overs for earlier late payments. Set total off against collateral and you get the hole in the provisions. Plus have a careful look at the valuation of bonds and similar assets.
These 2 things will have 90% or more of the crap in them. Well after a proper normal audit. With banks it is always in provisions/reserves and valuation methods.

Pure kicking the can. With Germany and Co in a Catch22.
Either do it properly and you require 500 Bn (or more) and there is no way you get that guaranteed in the North. Possibly subsequently putting a lot of marketpressure on the Southern banks.
Or you agree with this sloppy stuff and lateron there is no good argument left to stop the bankingunion going further (as apparently all old stuff is settled now) but with in real life 1/2 Tn rubbish (with capital, with assets it is likely much more). still hidden.

Rik said...

This is again an example of an issue where it would have been great if Cameron had been working on a grand strategy. Which issues should go back to national parliaments.
But also in which form things should take place.

It is simply hard to see if your strategy is basically geting powers back and have a balanced arrangedment with the EZ within the EU. How the UK or Sweden or any non-EZ country could agree herewith. You get deeper into the EU and 'chain' yourself stronger to the EZ in that process as well.
Simply doesnot fit in any reneg strategy.

Jesper said...

An insight into how Ireland is dealing with banks:

"The Irish it seems may have invented a third possibly better kind. It’s called the Immunity-so-you-don’t-ever-have-to-testify – against anyone."

Who wants to be part of a banking union if one potential member of said banking union is doing things like the above after huge bank failures?

Anonymous said...

Dear OE Team,

There is a story in today's Telegraph newspaper that this bailout mechanism is going to cost the UK GBP7Bn plus give it an open-ended liability to help fix Eurozone banks should a blow up occur.

Could you please provide some informed analysis as to whether this is true and what the immediate liability is for the UK and the also the ongoing open-ended liability might be?

Given that Eurozone banks are hiding large losses on property (South Med) and on EU sovereign debt holdings (such as Greece), it looks to me that Germany and the ECB are trying to pass the buck in terms of picking up the bill.

The UK fixed its banks immediately after the credit crisis first erupted in 2008 and has steadily ensured that UK banks continue to bolster their balance sheets. If other Eurozone nations had done likewise, and the Eurozone management mechanisms had done their jobs properly, we would not be in this constant state of flux. We all know that the debt problems in the Eurozone have not gone away and will reappear very soon.

The US, Far East and other global economies are marching away into the distance whilst the EU and Eurozone refuse to fix their problems and turn the continent into dust.

We need a UK referendum very soon.


Open Europe blog team said...

@Anonymous (SC) and @Rik

One thing to point out from the start is that this fund would only apply to Non-Eurozone countries and banks. So there is no risk of the UK bailing out any problem banks in the eurozone (of which we agree there are quite a few) – at least not under this proposal. Apologies if this was not clear in the blog.

The €7bn would also not be fresh cash. Firstly, this fund already exists, the proposal is simply to extend the scope of it to include banks in non-eurozone countries. Secondly, the UK would not have to contribute direct cash but does play a role in underwriting any loans given from the €50bn pot (UK’s share is around 14% hence the €7bn figure).

The liability is not open ended, because any increase beyond the €50bn ceiling requires unanimous approval and so the UK would have a veto on increasing this figure. However, loans given out up to that amount would be done under qualified majority voting, so the UK could be outvoted there.

That said, the UK retains a veto over the entire proposal in the first place, so it can stop any plans to adjust the fund to aid banks if it wishes.

As we say in the blog, this seems a strange proposal and the main concern is really the attempt to extend this banking union type approach to the entire EU and to allow for liability without oversight of other banking sectors.

For these reasons we’re sceptical as to whether the proposal will make any serious headway.

Denis Cooper said...

Blimey, "the UK retains a veto over the entire proposal" is not something we often read. Are you sure? A national veto which has actually survived all those treaties abolishing vetoes, treaties agreed with the support successively of Thatcher, Major, Blair, and Brown?

Anonymous said...

It seems to be yet another power grab by the unelected political failures that make up the commission of the corruption ridden democratically deficient eussr. It would be far more advantagous for the UK to ue that 7 billion to fund the nhs rather than hand it over to this bunch of no hopers.

Anonymous said...

Thank you OE Team.

I understand but see this as contagion. The scope of this fund will be changed in soon to encompass all EU banks, including the Eurozone? These are the next political steps, surely?

My questions would be (I don't expect you to answer them!):

- Which EU non-Eurozone nations require help with thier banks then?

- Will this apply to nations joining the EU from Eastern Europe in the not too distant future?


Rik said...

Not difficult to answer for this moment, just ask yourself which countries are in financial trouble.
A number of former East block that is.

Anyway it like with any Euro rescue attempt pretty clear which countries would likely receive help and which countries would likely have to pay for that.
Again the answer is simple: Eastern Europe and the UK and the Skandinavians.

If this is not fresh cash and apparently this money is available why did nobody come up with the idea to reduce the current budget contributions with it?

clinihyp said...

And so the long suffering British taxpayer will once again be forced into further debt in order to bail out the profligate, corrupt and fraud ridden EU!

Jull said...

While most EU banks need outer aid and the question of opening up
the door of the EU’s ‘Balance of Payments’ (BoP) for future pay-outs of funds
to aid other countries' banks is under discussion, alternative financial services come in force
to provide people support under crisis times.