EU proposals to address the weaknesses of the credit system
In just three years, between October 2008 and October 2011 EU countries had to “inject” funds in the European banking system for as much as 4500 billion euro, amounting to 37% of the Gross Internal Product of the Community. Few numbers, sufficient to explain the burden of the banking system on continental economy, triggered by the recession in the United States.
“New tools are needed”. The financial crisis “highlighted that public authorities are ill-equipped to deal with ailing banks operating in today's global markets”, the Commission states in a release issued on June 6, which underlines that the instability of credit institutes has impacted taxpayers, public budgets and businesses, and “failed to settle the question of how to deal with large cross-border banks in trouble”. For this reason the Barroso College presented a set of proposals for EU measures. Three kinds of tools, in harmony with those already implemented in some Member States, were identified. These are: “prevention”, “early intervention” and “crisis resolution”. An extensive document released by the Executive provides concrete information on the strategies. José Manuel Barroso, president of the EU Commission, said: “The EU is fully delivering on its G20 commitments. On the eve of the Los Cabos summit (June 18-19) the Commission “is presenting a proposal which will help protect our taxpayers and economies from the impact of any future bank failure”. The proposal is meant as “an essential step towards Banking Union in the EU. The Commission identified banking authorities’ availability to implement tools “to intervene decisively both before problems occur and early on in the process if they do”. Furthermore, “if the financial situation of a bank deteriorates beyond repair, the proposal ensures that a bank's critical functions can be rescued while the costs of restructuring and resolving failing banks fall upon the bank's owners and creditors and not on taxpayers”.
Who pays the dues? The measures identified by the Commission include in the field of “prevention” banks’ obligation to draw up recovery plans setting out measures that would kick in the event of a deterioration of their financial situation in order to restore their viability”. In the field of the so-called “early intervention” European Banking Authority (EBA) supervisors will have the power to appoint a special manager at a bank for a limited period when there is a significant deterioration in its financial situation whose primary duty is to “restore the financial situation of the bank and the sound and prudent management of its business”. The main tools for a “resolution of the crisis”, include the sale of business whereby authorities would sell all or part of the failing bank to a “bridge institution tool” which consists of identifying the good assets or essential functions of the bank and separating them into a new bank (bridge bank) which would be sold to another entity”. The old bank with the bad or non-essential functions would then be liquidated under normal insolvency proceedings”. The Commission highlights specific measures for banks that operate across borders. Futhermore, the framework provides for supplementary funding provided by resolution funds which will raise contributions from banks proportionate to their liabilities and risk profiles.
Coordinated management. The executive’s proposal, due to undergo approval by the G20, Member States, the European Council and the European Parliament – comes at a particularly delicate moment, marked by severe situation of the Spanish banking system, Greek instability, ongoing debate between the EU, the European Central Bank and Germany regarding interest rates, Eurobonds, financial stability facility. But the Commission reiterates that “The financial provided clear evidence of the need for more robust crisis management arrangements at national level, as well as the need to put in place arrangements better able to cater for cross-border banking failures”. In recent years “There have been a number of high profile banking failures during the crisis (Fortis, Lehman Brothers, Icelandic banks, Anglo Irish Bank, Dexia) which have revealed serious shortcomings in the existing arrangements. In the absence of mechanisms to organise an orderly wind down - is the EU’s position - EU Member States have had no choice other than to bail out their banking sector”.