The European Union has recently proposed a new set of rules aimed at preventing states from using billions of euros in aid to rescue struggling banks. The proposal seeks to ensure that banks maintain sufficient resources, including debt that can be written down to release cash in times of crisis, to avoid relying on taxpayer handouts.
The move comes after Italy used state aid to rescue Monte dei Paschi di Siena six years ago, which raised concerns about the practice and its impact on taxpayers. In addition, recent events such as the collapse of Silicon Valley Bank and Signature Bank in the United States, as well as the forced takeover of Credit Suisse by UBS, have underscored the need for more robust measures to prevent bank failures.
The European Commission, which introduced the proposals, said they “will enable authorities to organize the orderly market exit for a failing bank of any size and business model.” The rules update regulations that were introduced after the global financial crisis in 2007-09, which aimed to prevent banks from being “too-big-to-fail” and placing taxpayers at risk.
Under the current regulations, the failure of a large bank in the EU is handled by the Single Resolution Board. However, the winding down of smaller banks is subject to varying national practices that can result in the use of taxpayer funds. The new proposals seek to make it easier and more consistent to apply EU resolution rules instead of national practices to these lower-tier lenders on a case-by-case basis.
European Commission Vice President Valdis Dombrovskis told reporters that the proposals will not be an easy debate. German MEP Markus Ferber said that not all struggling small banks need to go into resolution, while markets body AFME added that the use of deposit guarantee funds should not prop up unviable lenders.
The proposals also make it more difficult for governments to inject state aid into struggling banks, known as precautionary capital, as Italy did with Monte dei Paschi in 2017. Governments will need to provide an explicit date for paying back the money or selling the bank.
It’s worth noting that the proposals do not attempt to revive a 2015 proposal for a pan-EU deposit guarantee scheme, and there is no change to the protection of 100,000 euros ($109,450) per account.
In conclusion, the EU’s new proposals seek to prevent banks from becoming too big to fail, ensure they maintain adequate resources to avoid taxpayer bailouts, and establish a more consistent approach to winding down lower-tier lenders. While there may be some debate over specific aspects of the proposals, their ultimate goal is to protect taxpayers from having to pay for the failures of banks.
