Eu commissioner proposes central banking regulation, says taxpayersmust not fund bail-outs by ferujkll sdff


Eu commissioner proposes central banking regulation, says taxpayersmust not fund bail-outs by FERUJKLL SDFF
Article Posted: 07/21/2013
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Eu commissioner proposes central banking regulation, says taxpayersmust not fund bail-outs

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BRUSSELS – European officials proposed Wednesday a new system of financialregulations that aims to keep bank failures from costing taxpayersbillions and bankrupting governments. Because many European governments are already overburdened withdebts, rescuing their failed banks risks bankrupting some of them.Ireland has had to ask for an international bailout for that reasonand investors fear Spain may be next. The banks, in turn, own huge amounts of their governments' bonds,which drop in value when investors lose confidence in the country'sfinancial future. The result is that any fall in confidence ineither the banks or the government tends to create a downwardspiral requiring foreign financial aid. Under the European Commission's proposal, banks that posed nosystemic risk to the stability of financial markets would simply beallowed to fail.

Those whose failure did threaten to becomeunmanageable would be propped up in part by having unsecuredcreditors of the bank, such as bondholders and shareholders, takelosses rather than having governments give them taxpayer money. "We're going to break the link between banking crises and publicbudgets," said Michel Barnier, the European commissionerresponsible for the internal market, as he outlined the measures inBrussels. "We don't want taxpayers to have to pay." If he ever achieves that, however, it will be too late to alleviatethe current banking crisis afflicting Europe and one of its biggesteconomies, Spain, where banks are sitting on huge losses that thegovernment cannot afford to plug. The Spanish government'sborrowing rates are at painfully high levels around 6.25 percent onfears it will go bankrupt saving the banks.

The Commission's complex proposal is not scheduled to take effectfully until 2018. In any event, it also needs the approval of theEuropean Council, composed of the leaders of the 27 EU countries,and the European Parliament, and may be significantly altered inthe process of gaining approval. At the moment in Europe there is no central regulator with thepower to step in and force weak banks to ask investors for morecapital to strengthen finances, or to break them apart andrestructure them. There is also no central deposit insurancebackstop, making it more likely that a bank failure would exhaustone country's fund to compensate depositors. In the United States, the Federal Deposit Insurance Corp., likeother bank regulatory agencies, sends examiners to banks andassesses their health.

Even before a struggling bank is closed,FDIC staff often seek buyers — stronger banks or privateinvestor groups — for its deposits and loans. Depositors' money isn't at risk. The FDIC guarantees deposits up to$250,000 per account, and no holder of an insured account has losta penny since the insurance fund was created in 1934. The FDIC itself doesn't close banks. That decision is made by thestate banking regulator, the U.S.

Office of the Comptroller of theCurrency or the Office of Thrift Supervision, depending on what thebank or thrift's charter. Once an institution is shut down, theFDIC is appointed receiver and takes over the process of sellingits deposits, loans and other assets, sometimes keeping a portionof the assets to be sold later. Barnier was at pains to emphasize that he had been working on theproposals for years, and they were not a response to the bankingcrisis in Spain or other recent bank bailouts. While Barnier said the new rules are necessary because so manybanks operate across borders, he did not propose setting up apowerful central banking authority, as the Commission had suggesteda weak earlier.

Many analysts say Europe needs such a central banking authority,which would have the financial power to bail out banks anywhere inthe eurozone, bypassing national governments that are oftenreluctant to admit the extent of problems in their domesticfinancial systems. It would also spread the cost of bailouts acrossmultiple countries. The importance of such a measure was made clear in the U.S. bankbailouts in recent years.

Insurer AIG, for example, failedfinancially and had to be rescued. Although it was incorporated inDelaware and headquartered in New York, neither state had to gobankrupt paying for the rescue. The burden was shouldered by theU.S. Treasury. Germany remains opposed to such a measure, however, fearing it willend up paying the bulk of bank rescues.

Barnier's proposal is more likely to be welcomed in Berlin. He saidit would strengthen the ability of national authorities to —hopefully — head off bank failures before they happen and todeal with them decisively when they do. "If we're going to avoid in the future banking crises, each memberstate has to be equipped with the appropriate tools to take actionin time, not when it's too late," Barnier said. All the national banking authorities would be operating with thesame rules — rules that would enable them to intervene early,require banks to draw up recovery plans, and even to dismiss thebank's management. If a bank was about to fail, national authorities would have thepower to sell or merge the businesses, to create a temporary"bridge bank" to carry out essential functions, to separate goodassets from bad ones, and to write down the bank's debts.

"The resolution tools will ensure that essential functions arepreserved without the need to bail out the institution, and thatshareholders and creditors bear an appropriate part of the losses,"the commission said in an explanatory statement on the proposal. This last part — having the bank's unsecured creditors takelosses — is being termed a "bail-in" in contrast to ataxpayer-funded bailout. Barnier acknowledged that the proposal would not have an immediateeffect, but he said EU officials need to take both short-term andlong-term actions to regain financial stability. Other measures that senior European officials have floated recentlyinclude creating a central deposit insurance scheme to reassuresavers across the continent that their money will not disappear incase a bank runs into trouble.

A key worry is that rumours of abank failure might trigger a bank run, fueling panic that couldspread across countries. ____ Don Melvin can be reached at twitter.com/Don_Melvin.

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