Injecting government cash into struggling banks may be less costly to taxpayers in the long run than the fallout from allowing them to collapse, according to European Central Bank vice-president Vitor Constancio.
The European Union’s Bank Recovery and Resolution Directive, which is intended to make investors, not taxpayers, pay for bank failures, “deserves full support, as it represents a change from easy public bailouts to a new culture of private bail-in, minimising moral hazard,” Constancio said in a speech in Rome on Wednesday.
“Notwithstanding this, the regulation does not ignore financial stability considerations.”
Constancio said that in some circumstances, the costs of financial instability caused by a bank failure could exceed those of a state rescue in a crisis. He compared the “worldwide costs for taxpayers” stemming from the decision not to save Lehman Brothers with the “zero cost” of US emergency aid for other firms, which has been repaid in full.
The EU laid down new rules for how to deal with failing banks in 2014, after member states used almost €2tn to prop up banks during the financial crisis. The BRRD foresees small banks going insolvent like non-financial companies. Big ones that could cause mayhem would be restructured and recapitalised under a separate procedure called “resolution,” in which losses are borne by owners and creditors.
The issue of public support for banks has come to the fore as Italy tries to prop up Banca Monte dei Paschi di Siena with an €8.8bn ($9.9bn) recapitalisation that relies on a provision in BRRD that allows state aid for solvent banks. Italy is also in talks with EU officials on a rescue of Banca Popolare di Vicenza and Veneto Banca.
“A solution for the two Veneto banks must be defined in a very short time, safeguarding the savers and guaranteeing continuity in the credit relationships affecting many small and medium-sized companies operating in a major economic area of the country,” Bank of Italy Deputy Director General Fabio Panetta said on Wednesday. “The commitment of Italian authorities in this direction is maximum.”
If the plan is successful, the Italian banks would avoid the fate of Banco Popular Espanol, which was put into resolution earlier this month.
Speaking to reporters after his speech, Constancio said his remarks didn’t necessarily apply to the “concrete case” of the Veneto banks, but were instead a “general message that financial stability considerations have to be always involved in solutions.” Many European banks are struggling under a mountain of bad loans, and policy makers are working on state-supported solutions to help them clean up their balance sheets. Constancio said governments could play a role in supporting the “correction of the NPL market failure,” as well as sponsoring asset-management companies to help shift the loans.
According to an EU report, it would be “conceivable” for governments to use so-called precautionary recapitalisation aid to finance impaired-asset measures so long as the rules on state aid are observed.
“Dealing with the issue of high NPLs should not imply any deviation from the rules of the banking union,” the report states.
EU finance ministers are scheduled to discuss the soured-loan issue when they meet in Luxembourg on June 16.
Constancio: Less costly to taxpayers.
