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The two Italian banks facing financial crisis.
The two Italian banks facing financial crisis.

EU Should Rectify Rules for Banks Facing Liquidation

EU Should Rectify Rules for Banks Facing Liquidation

A decade has passed since the start of the financial crisis, but when it comes to handling struggling banks, the European Union still hasn’t moved on.
Italy’s taxpayer-funded wind-down of Banca Popolare di Vicenza SpA and Veneto Banca SpA highlighted the patchwork of EU and national laws and guidelines that govern the funneling of public money to banks, despite years of work on a common rule book intended to end the era of big bailouts, Bloomberg reported.
In allowing Italy to pour as much as €17 billion ($19.4 billion) into liquidating the two banks, the European Commission relied on its guidance that state aid for banks is justified “as long as the crisis situation persists, creating genuinely exceptional circumstances where financial stability at large is at risk.” The 2013 document, which replaced guidance from five years earlier, hasn’t been updated, meaning that as far as the EU is concerned, the crisis rages on and taxpayers can foot the bill when banks collapse.
“In the world of bank regulation there are still two parallel universes: one where bank bailouts are frowned upon as an abuse of taxpayers’ money, and another where bank bailouts are considered as a politically more expedient and cheaper way of solving banking crises,” said Christian Stiefmueller, a senior policy analyst at the independent watchdog Finance Watch in Brussels. “These two sets of rules are not compatible.”
The EU laid down new bank-failure rules in 2014, after member states used almost €2 trillion to prop up lenders during the crisis. The Bank Recovery and Resolution Directive foresees small banks going insolvent like non-financial companies. Big ones that could cause mayhem would be restructured and recapitalized under a separate procedure called resolution, in which losses are borne by owners and creditors, including senior bondholders if necessary.
Italy succeeded in keeping Banca Popolare di Vicenza and Veneto Banca out of resolution, allowing it to shield senior creditors, when the Single Resolution Board said it wasn’t warranted because of the banks’ small size. That meant Italian authorities were free to dispose of the lenders under national insolvency law, which varies widely across the 28-nation bloc.
The confusion has prompted concern and calls for reform. “One might ask, why is national insolvency law more favorable for the owners and creditors than if the resolution is done according to the rules of the European resolution authority,” German Finance Minister Wolfgang Schaeuble said on June 28.
Bank of Italy Deputy Director General Fabio Panetta said EU rules on bank failure should be improved to make the process of state intervention more effective.

 

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