WirtschaftsWoche Exclusive

Footing the Bill for Failure

  • Why it matters

    Why it matters

    The question of who should foot the bill of failed banks is highly controversial, with the E.U. tending towards protecting taxpayers and letting investors pick up the tab.

  • Facts


    • The Single Resolution Mechanism, created in 2014, plans for and executes the closure of failing banks across the euro zone to limit economic fallout.
    • Elke König, the former head of Germany’s financial regulator, has headed the agency since 2014.
    • She believes state bailouts have a place, but that investors must accept responsibility for risky gambles on creaky banks.
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Bafin-Chefin Elke König
Elke König is not against bailing out failing banks. Source: DPA

Elke König has been in charge of the Single Resolution Mechanism in Brussels since the end of 2014. A key pillar Europe’s banking union – an effort by the continent to pool its resources and supervisory functions in the aftermath of the 2010-2012 debt crisis – her agency plans for and executes the closure of failing banks that have business across the euro zone. The goal is to close them with limited economic fallout. Ms. König was previously head of Germany’s financial regulator, the Federal Financial Supervisory Authority (BaFin).

Her job could be about to get much harder. Several Italian banks are currently teetering on the brink, a problem made worse by the country’s decision to vote against constitutional reforms last Sunday, prompting the resignation of Prime Minister Matteo Renzi. So far, the country’s government has been trying to avoid bank liquidations because an unusually large number of bank bonds are held by private individuals in Italy. It is considering a state bailout that would be backed by Europe’s own bailout fund, the European Stability Mechanism.

Despite her role, the 62-year-old Ms. König is not ruling out the use of state funding to solve the country’s banking problems. If investors have been misled, then some may be entitled to compensation, she told WirtschaftsWoche, a sister publication of Handelsblatt.

But Ms. König’s complaint is that private investors have obviously underestimated the risk inherent in bank bonds, and should shoulder some responsibility. Such a view is likely to put her at odds with private investors.

While her job may be to expect the worse, Ms. König is actually optimistic about the state of Europe’s banks: “Horror scenarios are nonsense,” she told WirtschaftsWoche.

Ms. König expands on her thinking on bailouts, bad debt and low interest rates in the full interview below.

The margin for error is certainly becoming less.

Ms. König, it is being said some Italian banks might be rescued with state funding. Your agency is supposed to liquidate institutions if they fail. How far along are you?

By the end of the year, we will have worked out resolution plans for the vast majority of the banks we are responsible for. They are based on extensive analyses and outline the individual steps in existence-threatening crises. First of all, banks write off capital, then liabilities are converted into additional capital. Hopefully, we’ll end up with a restructured, solvent institution.

In Italy, that would directly affect private investors.

If investors were unable to adequately assess the risks, then certainly individual cases must be reviewed to see if there are entitlements to compensation. But we don’t want to act as if bank bonds had been gilt-edged securities.

Is the mechanism too complicated?

We could outline all of it on one piece of paper. Now we have to work out and operationalize the whole thing in detail. That’s a multi-year project. We have begun to identify obstacles. The next step will be deciding what institutes need to structurally change so that we can implement the plans in the event of a worst-case scenario.

Can they be applied at all?

Planning is tremendously important. If I have already thought through a scenario, I can adapt it more quickly. If I have been concerning myself with one major bank that is active in a number of countries, the knowledge can help with the problems comparable institutions are having. But in the end, the problem doesn’t necessarily turn out to be the one expected. If the sticking point was real estate the last time, it’ll be something else in the next crisis.

Is a crisis threatening Europe’s banks?

A lot has happened since 2008 [the year of the financial crisis]. The banks have more and better capital. And we have a more agile European supervision that is addressing relevant issues. Of course, some matters in the financial system still have to be addressed. But on the whole, the European banking system is following the right course.  Horror scenarios are nonsense.

Aren’t the Italian institutions’ bad loans a reason to worry?

Bad loans are an issue in a couple of countries, in Greece, Portugal and Italy. The banks must act with greater determination, but the pace is also a question of economic consideration. The causes are complex and it will take time to solve the problem. In any case, it can’t be done without losses.

How dangerous are the low interest rates?

The margin for error is certainly becoming less. If there isn’t even a two in front of the comma in the interest on loans, banks will have a hard time when there are more defaults on loans.

Europe’s banks complain about an excess of regulation. Can you understand that?

The institutes also see the benefit of resolution plans and the advantages of better data systems and simpler structures. Naturally, the cost and effort is coming at a time when there is pressure on profitability. But we can’t give up.


This article originally appeared in the business magazine WirtschaftsWoche, a sister publication of Handelsblatt. To contact the author: online@wiwo.de

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