emergency lite

Don't Bank on a Bailout

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Don't need any more money. Elke König, the head of the EU's new bailout fund.
  • Why it matters

    Why it matters

    The size of the E.U.’s new bank bailout fund is key to whether taxpayers will once again have to rescue European banks in a future crisis.

  • Facts

    Facts

    • German trade unions consider Europe’s resolution fund under-financed.
    • The European fund has been allotted only €55 billion ($60 billion) to wind down banks.
    • But banks have to pay into the pot by 2023, much faster than a German predecessor.
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    Audio

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Europe’s new bank-financed bailout fund has barely gotten off the ground, and already there are concerns that it may be too small to stave off another financial crisis in the future.

Left-leaning groups in Germany are particularly upset by the European plans for a levy on banks, fearing it is much less robust than is warranted by the number of “too-big-to-fail” banks that exist in Europe today, and may not be enough to prevent taxpayers from again footing the bill for bank failures one day.

The German Finance Ministry has rejected the accusation, and some other politicians have also come to its defense, noting that banks are being pushed to fill the bailout fund’s coffers more quickly than any of its predecessors.

The new European bailout fund is one of the cornerstones of an ambitious effort in the past few years to bring the European Union’s largest banks under one regulatory roof, including by making the European Central Bank responsible for supervising the largest financial firms on the continent.

It is a bid to draw lessons from the 2008 global financial crisis, when taxpayers in various European countries were forced to bail banks out, and cross-border squabbles between regulators delayed attempts to nurse the financial system back to health.

Germany has been something of a trailblazer for the European project, having set up its own bank-financed bailout fund in 2011. Elke König, the one-time head of Germany’s own banking supervisor BaFin, has been nominated to lead the new European resolution fund, which is designed to help finance the liquidation of a large bad bank in future and avoid a system-wide financial crisis in the process.

But trade unions and politicians from the Left Party in Germany said they were concerned the European resolution fund had been allotted only €55 billion, or $60 billion, to wind down potential trouble banks. That is far less than the €70 billion Germany had planned for its own national emergency fund for troubled financial institutions.

“Europe will have a much smaller fund for a much bigger problem,” said Axel Troost, the financial policy spokesman of the opposition socialist party The Left.

The payment period for Germany's national resolution fund was set to be over 50 years, however, the contributions had been much smaller than planned.

Critics point to studies from the International Monetary Fund in Washington, which has suggested the size of any bank resolution fund should equal about one percent of a country’s gross domestic product.

“In order to meet the minimum requirements of the International Monetary Fund for an effective resolution fund, the fund would need to have at least €100 billion,” the Confederation of German Trade Unions, the DGB, wrote in a letter to German lawmakers seen by Handelsblatt.

Germany’s contribution to the European fund is expected to be only €15 billion, just a fifth of what was originally meant to go into a German pot, according to a Berlin government draft legislation being proposed to adjust the country’s own bank resolution law.

“There are no justifiable regulatory grounds to cut funding for resolution mechanisms,” Mehrdad Payandeh, the director the DGB’s financial policy unit, told Handelsblatt.

A spokesman for the German finance ministry, however, defended the new rules, arguing that banks will have to pay into the European resolution fund much sooner.

The emergency mechanism being led by Ms. König is supposed to have reached its fill by the end of 2023. That compares to a 50-year time frame given to banks paying into the now-defunct German fund.

“That means the time frame for reaching the target volume for the European resolution fund is not comparable with the requirement for the German restructuring fund,” the finance ministry spokesman told Handelsblatt. “So there is no recognizable easing on German banks.”

Going by previous payments made to it, Germany’s national resolution fund would have been filled even slower than originally planned. This was caused in part by contribution limits and other elements cutting the burden on banks.

Germany’s Federal Audit Office recently criticized that it would have likely taken 100 years to fill the German bailout fund at the previous rate.

Such weaknesses in Germany’s approach have led some to grudgingly back the European alternative – even if the total amount will be smaller.

“The German legislation for the resolution fund was unrealistic from the start,” said Gerhard Schick, the financial policy spokesman for the Green party.

He said the government had attempted to present a false image of stability for the German financial system.

“The European regulations at least have a realistic correlation between size and timing components,” he said.

German banks, therefore, will not have it any easier for the time being. The bank levy for the E.U. pot is much more demanding in the buildup period. The German bank tax, for example, cost the WGZ Bank €10 million a year. But the European fund will “amount to €30 million in the best case, just over €50 million in the worst case,” said the bank’s boss Hans-Bernd Wolberg.

 

Yasmin Osman covers the banking sector and regulation in Frankfurt for Handelsblatt. Norbert Häring is Handelsblatt’s lead economist in Frankfurt. Christopher Cermak of the Handelsblatt Global Edition also contributed to this article. To contact them: haering@handelsblatt.com, osman@handelsblatt.com and cermak@handelsblatt.com 

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