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17 July 2018

Bloomberg: Europe told to boost firepower to deal with future bank failures


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Weeks after agreeing on steps to shore up the currency union, politicians received a reminder that the arsenal to handle banks in trouble remains incomplete without the power to provide hundreds of billions of euros in emergency cash.


Elke Koenig, head of the euro area’s bank-failure agency, said that even a new arrangement that doubles the firepower of her institution’s crisis fund may not be enough to return a failed bank to the market. Her call faces skepticism on multiple fronts, including in Germany, where officials have prioritized other reforms.

After months of divisive talks on how to develop the euro area, heads of government agreed last month to provide a public guarantee to the Single Resolution Fund, which can be used to restore a bank’s health after it failed. The pot is still being filled by banks themselves and is meant to reach 1 percent of protected deposits by 2024. Based on current balance sheets, that corresponds to about 60 billion euros, which the public backstop may double.

When a large bank fails, funding needs can quickly outstrip those numbers, Koenig said. “When you look at the last crisis, on the liquidity side, to talk about 100 or 200 billion euros is not out of reach,” she said. The assumption that the market would quickly provide the necessary funding after losses have been imposed on investors isn’t realistic either, she said.

After a resolution, which ideally happens on a weekend, a bank “doesn’t have any decent collateral and the market will still be scratching its head to see how this really plays out,” Koenig said. She reiterated that central banks may be best placed to quickly provide the cash injections.

The European Central Bank has started to develop a new tool that would allow it to provide funding to banks that are rescued from insolvency. The measure is controversial, as the ECB is banned by law from financing action that should be taken by public authorities, such as bank resolution. The plan also foresees a far-reaching public guarantee to guard against central bank losses.

Full article

Speech by Elke König, Chair of the SRB at the ECON Committee Hearing, European Parliament



© Bloomberg


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