18 March 2013

Finance Watch: Report on the European Commission's Bank Resolution Recovery proposal

This position paper puts forward Finance Watch's analysis and position on Bank Recovery and Resolution. The report discusses preventative measures, resolution tools and questions of governance.

Summary

• The overall aim of bank recovery and resolution should be to prevent bank failures becoming a systemic crisis affecting the rest of the financial system and/or the rest of the economy.
• This can be achieved first and foremost, by taking preventative measures such that when banks fail minimal action must be taken to avoid systemic problems.
• Second, resolution tools can, to some extent, be defined in advance of crisis. These tools should allow authorities to manage bank failure, minimising the risk of systemic problems and the cost to taxpayers of doing so.
• The European context in particular raises question of governance around such issues: to reconcile national and supra-national responsibilities and powers and in doing so to be democratically accountable.

The report discusses preventative measures (section 4), then resolution tools (section 5), and finally, briefly, questions of governance (section 6).

Duncan Lindo, senior policy analyst at Finance Watch and author of the report, said:

"Prevention is better than cure. Recovery and resolution planning, together with structural and other reforms, should be used to address too-big-to-fail, too-complex-to-fail and too-interconnected-to-fail banks before crisis strikes. As we are seeing in Cyprus, allowing banks that cannot fail or be resolved poses a threat to the entire financial system and therefore to the whole economy of a country."

"Bail-in should be broad and systematic and respect the creditor hierarchy. This is critical to protecting taxpayers from shouldering the burden of private creditors. All and any exemptions to bail-in will distort activity, encourage bubbles in the exempted liabilities and so undermine the effectiveness of the bail-in mechanism. As we are seeing in Cyprus, ad hoc deviations from these clear principals spread uncertainty and make restoring confidence in Europe's banks even harder."

Thierry Philipponnat, Secretary General of Finance Watch, said:

“We see the "financial stability" argument used all the time against the bail-in of creditors but this is a fundamental perversion of the system: what is the added value of a banker's job if he or she has the certainty of getting their money back in all circumstances? If there is no risk in lending, money gets lent to all the "wrong" destinations.”

"This way of operating is not only unsustainable but politically and morally unacceptable. Future regulation, in particular the BRR, must absolutely tackle this issue or we will not put finance back to where it belongs: serving the economy and society.”

Press release

Full report

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