Too Little, Too Late?
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
The European Commission gave its blessing to a plan proposed by Italian authorities to liquidate small troubled banks in Italy with total assets of less than €3 billion. Under the plan, as a failing bank is “resolved,” its assets and liabilities will be transferred to another lender under national insolvency proceedings. When liabilities (including deposits) exceed the value of good assets (mostly loans), the gap would be dealt with by giving haircuts to unsecured creditors — including insured depositors who would then be made whole by the respective national deposit guarantee fund — and by mobilizing taxpayers.
The new resolution plan will be available not only to Italy. Each Eurozone member state will have the option to “set up schemes to support the orderly exit of small failing banks, adapted to the conditions in each market.”
Italy, like many other EU countries (including France, Spain and Germany), has pathetically inadequate funds in its deposit guarantee fund — hence the need to mobilize taxpayer funds. Under rules passed in 2014, EU member states need to have funds in deposit guarantee schemes equivalent to at least 0.8% of the covered deposits, but given that most countries don’t even come close to that, they’ve been given until 2024 to reach the target.
The last time the European Banking Authority checked, at the end of 2016, Italy, like Ireland and the Netherlands, had guarantee funds equivalent to just 0.1% of covered deposits. In Spain the figure was around 0.2%, while in France and Germany it was 0.3%.
All EU bank deposits are guaranteed up to €100,000, regardless of how much is in a member state’s fund. Senior bondholders are also protected from any financial fallout. But if a large enough bank collapses in a disorderly enough fashion, trying to plug the massive financial holes it leaves behind can suddenly become a very difficult task, as Spanish and European authorities learned in June last year when Spain’s then-sixth biggest bank, Banco Popular, succumbed to a run on deposits following years of chronic, if not criminal, mismanagement. In its final days, Popular was bleeding funds at an average rate of €2 billion a day.
In the end, Europe’s Single Supervisory Mechanism decided that the bank was insolvent. Popular, warts and all, was sold for €1 to Banco Santander, which had to raise €13 billion of fresh capital to digest the deal. At least part of those funds will be returned to Santander through tax credits.
If Santander hadn’t intervened and Popular had been allowed to collapse in disorderly fashion, some of its €60 billion of deposits would have been at risk, El País reported. A total of €35.4 billion were guaranteed. But Spain’s Deposit Guarantee Fund (DGF) didn’t have nearly enough liquidity to cover those deposits and would itself have had to be bailed out by the Spanish state in order to reimburse Banco Popular’s customers.
It’s not clear exactly how much money Spain’s DGF has in its coffers today, but there’s good reason to believe it has even less than it had at the end of 2016, when it had a paltry €1.6 billion — far short of the €6.4 billion it’s supposed to have by 2024. It might be drained by now.
So, what happens if another mid-sized lender like Popular begins to wobble? Given that in June 2017 the EU was home to 597 medium-size banks, which the ECB defines as banks whose assets represent between 0.5% and 0.005% of the total consolidated assets of EU banks, this is not a hypothetical question. And it’s one the ECB is apparently beginning to take very seriously.
The ECB is considering launching a new policy tool that would allow it to inject cash into banks that are being rescued from the threat of insolvency. And that cash, once again, will come from government coffers.
ECB vice president Vitor Constancio cited Britain, where the Bank of England can request an indemnity from the government on loans extended to banks in resolution, and the United States as possible models. At the moment European rules bar the ECB or its affiliate nation central banks from supporting a failing lender while the European Union’s Single Resolution Board mounts a rescue mission.
“The UK and U.S. have… a solid, whole process of resolution that includes those liquidity problems during that period of time, and I hope that Europe will get to some solution to this problem,” Constancio told the European Parliament.
To that end, the ECB has already created a new lending facility called Eurosystem Resolution Liquidity. All it’s waiting for is a green light from the Eurogroup of euro zone finance ministers.
But that could be a long time in coming, especially given fears among richer countries that the new rules could be used to prop up failing banks with public money — fears that the last raft of EU banking laws was explicitly designed to put to rest. In the meantime, one thing is abundantly clear: Even at this stage of proceedings, six years after Europe’s debt crisis, the Eurozone is far from prepared for another rash of banking failures. By Don Quijones.
UK regulators may be on the verge of doing something right, but doubts remain over how genuine their stated intentions are. Read… After a String of Corporate Scandals & Collapses, “Big Four” Accounting Giants Face Breakup in the UK
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Sounds similar to what Paulson and his crew tried a decade ago?
You can work back and identify the tab holder – tax payers.
If the tab comes due the big payers will be Germany, Holland etc but in such a way the plebs won’t understand.
“We Europeans”, out of the mouths of politicians and the elite, will be heard across the continent.
Who will shout “stop”?
What’s to worry about ?
I’m sure the European bankers have everyone’s best interest at heart ….
Right?
Isn’t Failing Banks = Europe’s Financial System?
The irony is thick here. The whole system is linked up.
That’s what I’ve been wondering. What is it about the Financial System that causes small banks to fall over and die? Why is business so bad?
The coming implosion of the central bankers’ financial house of cards, built on limitless “stimulus” (aka debasement of the currency), artificially cheap credit, and mark-to-fantasy accounting, is going to be epic when they finally run out of road to kick the can.
Interesting one in Italy is the struggling banks with more than 3bn in assets.
“by giving haircuts to unsecured creditors — including insured depositors who would then be made whole …”
This left a question in my mind whether all unsecured creditors or only insured depositors would be made whole from the national fund. As punctuated, it seems to be only the insured depositors, which seems appropriate, but given the history of Italian bank bailouts, I wanted to check to make sure this wasn’t more ECB intentionally crafted ambiguity.
Eastwind,
All unsecured creditors will not be made whole. Shareholders and subordinated debt holders will suffer losses as is the case in any bank failure.
http://europa.eu/rapid/press-release_IP-13-672_en.htm
I also disagree with Don Quijones when he includes insured depositors in with the unsecured creditors that will being given “haircuts” since this implies that insured depositors will lose money in a bank failure much like what happened to uninsured depositors in Cyprus. That is not the case and he even states that insured depositors will not lose money. So why say that insured depositors will take a “haircut” when they really will not?
JMiller,
ALL — repeat, ALL — depositors are unsecured creditors, period! ALL. However, some depositors are covered by an entirely separate insurance program. Each country has its own. In the US, the FDIC runs it. It’s like any credit insurance, but it’s run by the government (and in the US, backed by the US Treasury).
So that must always be pointed out: deposits are ALWAYS UNSECURED, period. However, some deposits are insured. This is super-important to get straight about the banking system.
Wolf,
I already knew that all depositors are unsecured creditors but that some depositors are insured. I am quite knowledgeable about the FDIC and about bail-ins etc.. You may have misunderstood what I was getting at. I disagree with Don Quijones wording when he says that insured depositors, who are unsecured creditors, will take a haircut (suffer a loss) when they really will not, which he himself says that they will be made whole. That’s all I was pointing out.
Oh, and as American, I trust our deposit insurance program by the FDIC. No reason to lose sleep over it. Follow the rules, and you’ll be made whole. I’ve been involved in three bank collapses in the US, two of them major banks, including WaMu during the Financial Crisis. The FDIC moves in Friday evening, and Monday morning it’s business as usual with a different name on the bank that holds the deposit. No wait period. Money available at the start of business.
Not all countries have a system that works this well.
You read it correctly. Only insured depositors up to the limit of €100,000 would be made whole. Haircuts for everyone else in the unsecured department.
For example, if a depositor has €500,000 in a bank that collapses, the first €100,000 is insured, and the depositor will get all of it. The remaining €400,000 is subject to a haircut. This is rarely a total loss, since the bank has a lot of assets that cover most but not all deposits. So the loss (haircut) may be 10% of the €400,000. The remainder, say €360,000 will be paid out when everything is said and done (this might take a while).
That doesn’t mean that rules don’t get bent and that taxpayers are recruited to make everyone whole.
You are correct Wolf. Historically that has been the case when a bank fails. It is rare that an uninsured depositor loses all of his uninsured money.
I am not sure if I am reading it correctly, but my understanding is that the insured deposit limit is per account. So e.g. a savings account and a retirement savings account would be treated as separate accounts, but it can wary by country, so it’s difficult to generalize.
This depends on the country, and I don’t know the rules for the EU countries.
In the US, you’re correct. It’s per “type” of account — really just two types: retirement and deposit-type accounts. But the limit is $250,000.
At your broker, you can buy 10 CDs of $250K each (for a total of $2.5 million) from 10 different banks and all are covered by the FDIC.
So when you buy brokered CDs, and you have a lot of money to invest, it’s best to go to the FDIC website and study the rules thoroughly.
lets face it, in the end the ECB will just (have to) print the money to rescue the banks, it doesn’t cost them anything to do this. In effect this just creates further distortions of the already wildly distorted “freemarket” but no direct and obvious damage.
So, when push comes to shove the rules will be changed to rescue the banks.
normsdog,
You are correct. There will be taxpayer bailouts even though some in the ALT media say that there can be no more bailouts, just bail-ins. In the U.S., a taxpayer bailout will happen long before one penny is lost to insured depositors. I also do not even expect uninsured depositors to take much of a loss in a bail-in if one of the big banks fail.
This applies for sure when a big bank topples, such as Deutsche Bank. At that point, rules no longer matter. The bank will NOT be allowed to collapse. However, there could be losses for unsecured creditors, especially those holding Co-Co bonds which are supposed to be bailed in first while the banks is still upright.
I agree Wolf.
It is a vicious circle; the government will have to borrow to bail out the depositors because debt doesn’t matter, and the bonds will be bought by other banks. On the bright side, it’s just a monopoly game, so what could go wrong?
“ECB vice president Vitor Constancio cited … the United States as possible models (for insuring bank depositor’s accounts)”
Really?
“A March 2008 memorandum to the FDIC board of directors shows a 2007 year-end Deposit Insurance Fund balance of about $52.4 billion, which represented a reserve ratio of 1.22% of its exposure to insured deposits, totaling about $4.29 trillion. The 2008 year-end insured deposits were projected to reach about $4.42 trillion with the reserve growing to $55.2 billion, a ratio of 1.25%.[37] As of June 2008, the DIF had a balance of $45.2 billion.[38] However, 9 months later, in March, 2009, the DIF fell to $13 billion.[39] That was the lowest total since September, 1993[39] and represented a reserve ratio of 0.27% of its exposure to insured deposits totaling about $4.83 trillion.
“In light of apparent systemic risks facing the banking system, the adequacy of FDIC’s financial backing has come into question. According to the FDIC.gov website (as of March 2013), “FDIC deposit insurance is backed by the full faith and credit of the United States government. This means that the resources of the United States government stand behind FDIC-insured depositors.”[49] The statutory basis for this assertion is unclear, however. Congress, in 1987, passed a “Sense of Congress” to that effect,[50] but such enactments do not carry the force of law.”
https://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corporation#Funds
So, why are these insolvent banks allowed to operate in the first place? If regulations made harder for these kind of banks to exist, governments and taxpayers wouldn’t have to save them.
This is just a band-aid that also scams money from people living in the Eurozone. They really should change laws and regulations already before banks sinking end sinking the Eurozone into another crisis.
You can’t regulate away greed and foolishness. As long as we want to have banks we will have to put up with periodic bank failures. But we could do far better than we do.
Why do we still have banks that are too big to fail?
Unfortunately the answer is that big banks donate a lot of money to politicians who are responsible for passing regulations. Here we are 11 years on from 2007 and there is plenty of political pressure to roll back even more of the reforms put in place after that disaster.
Politicians pass regulations after the disaster, when the taxpayers are upset at having to bail out the banks, then roll back the regulations when the voters stop paying attention. Most voters don’t understand the regulations, really, so it’s too easy for the politicians to spin negligent levels of regulation as being good for the consumer or some other bromide.
Why shouldn’t big bank CEO’s have a sizable percent of their personal wealth locked into their bank’s stock so that a bank failure even after they retire would deal them a crushing financial blow? Pay them up to a million bucks a year for salary, but require any/all additional compensation to be escrowed and invested in the company stock until 5 years after they retire. That might shift their focus a bit toward safety and less on quarterly returns.
Study a bit of story and you will realise that once upon a time investment banks and saving banks were separated to avoid this exact type of banks sinking taking people money away.
Agreed Raxadian after almost ten years you would have thought the insolvent banks would have gone- been taken over.
I believe the ‘insured’ limit of 100k for bank accounts in Europe is per person, per account with individual banks. If for example you had 100k in Santander and 100k in Banco Popular before the acquisition (wishful thinking), all well and good. However after the merger, only 100k would be ‘insured’.
The merger problem you identified occurs in the US too. But here, the FDIC gives you a certain amount of time to move your money (months), and if it’s a CD, it might exempt that CD from the limit calculations, which is what happened to me during the Financial Crisis. I got a letter to that effect.
Surely the proof of what happens is to examine what happened to depositors at Banco Popular.
As far as I’m aware each bank deposit (savings) account is insured up to €100,000.00. If you have €100,000.00 in a bank account and that bank goes bust, the State promises to refund you all of that money. Deposits in excess €100,000.00 are more problematic.
The state promises to refund that depositor up to €100,000.00, but there is no promise as to refund the amount in excess of €100,000.00.
For example if I have €127,555.00 on deposit at the time the bank goes bust, the state will refund me €100,000.00 but €27,555.00 is not state guaranteed.