Thursday, 12 July 2012

Bail-Out, Bail-In - how about Bail-Never?

Almost four years after the financial crisis kicked in full force in September 2008, the EU is still working on plans of what to do with "banks and investment firms" next time.

According to a summary statement of their latest proposal "In the future, bail in instead of bailing out, says a Commission proposal on the recovery and resolution of credit institutions and investment firms, presented to the finance ministers at the Ecofin Council on 10 July 2012". Further, "the proposal's main elements are":

1. Prevention: Banks and national supervisory authorities will be required to draw up recovery and resolution plans on how to deal with financial stress.

2. Early intervention: Authorities will have wider powers to intervene when a bank is about to breach regulatory capital requirements. They can appoint a special manager to oversee the bank.

3. Resolution: In the event of incipient insolvency, resolution tools would allow authorities to restructure the failing bank or wind it down in an orderly manner. In particular, authorities would have powers to

● sell all or part of the business to another entity
● transfer the clean assets and essential functions into a publicly controlled temporary "bridge bank" to enable them to be sold to another entity, and liquidate the old bank
● separate clean and toxic assets between good and bad banks in order to carry out restructuring (by means of a bridge bank, sale of business or write-down)
● impose losses, in order of seniority, on shareholders and creditors ("bail in").

The proposal further states (p 5)

"Because of this systemic risk and the important economic function played by institutions (i.e. banks and investment firms), the normal insolvency procedure may not be appropriate in some cases and the absence of effective tools to manage institutions in crisis has too often required the use of public funds to restore trust in even relatively small institutions so as to prevent a domino effect of failing institutions from seriously damaging the real economy".

"Accordingly, an effective policy framework is needed to manage bank failures in an orderly way and to avoid contagion to other institutions. The aim of such a policy framework would be to equip the relevant authorities with common and effective tools and powers to address banking crises pre-emptively, safeguarding financial stability and minimising taxpayers' exposure to losses".

"Too often required the use of public funds" they say. It never actually required public funds, the authorities explicitly chose to spend (steal that is) tax payer money to save the banks. Let the insolvent banks fail instead and do nothing (or very little), just like other non-bank and not to big to fail companies that also provide important functions to society. Having spent already almost four years to reach this point (they will spend another 10 years + as long as they receive their salaries and benefits and retain the power assigned to them) it is amasing voters in Europe is yet to fully realise something is cleary wrong with the whole EU, especially the EMU, and the banking system and not revoltet more in Europe than they have. Instead of spending more time on this futile project, the Commission and the EU should instead set aside one month to study the basics of Austrian Economics, say no to bailing in or out and let the free market sort things out themselves.

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